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Jack Falvey's Investor Education Briefs: You should know who Arthur Laffer is

By JACK FALVEY
December 17. 2017 8:42PM




We live in a geophysical, spiritual and economic world simultaneously. Knowing the big players in all these worlds is of great value.

Because death and taxes are reputed to be constants, we should know something about each. Arthur Laffer specializes in taxation and how it affects us and the governments collecting our money. He is considered an economic saint by some and an economic Satan by others. Either way he generates heat.

The question that he posed was: What tax rate will produce the most revenue for the operation of government? His answer involved plotting tax income along a line with 0 percent at one end of the scale and 100 percent at the other end.

His goal was to determine what tax rate will yield the highest return; 0% produces 0, but 100 percent also produces 0. Somewhere along the “Laffer curve” is a rate which, if exceeded, will begin to reduce the amount of revenue paid in taxes, because those paying the taxes will shift their resources to activities being taxed less or not at all, if possible.

Using the taxation of investment income, for example, he was able to plot a point at which if you increased the tax rate, those earning investment income would invest less of their resources. This would reduce tax income when the rate was increased beyond that point.

Generally, he determined that tax rates were higher than they needed to be to produce the income required, and if they were reduced, the economic activity they taxed would increase, and so it would produce more tax income at the lower tax rate, all things being equal, which they seldom are.

This economic premise is debated by many in government, thus possibly limiting the resources available to them. The private-sector economy that creates the wealth to be taxed must be allowed and encouraged to produce that wealth. The after-tax profits that result then are recycled to produce additional taxable economic growth.

Arthur Laffer attempted to apply the law of diminishing returns to taxation. His effort was not appreciated by all. You now know something about the economic heat he generated.

Jack Falvey is a frequent contributor to the Union Leader, Barron’s and The Wall Street Journal. He can be contacted at Jack@Falvey.org.


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