Tag Archives: Laffer Curve

Laffer’s Curve

The Laffer Curve

The Laffer Curve.  It’s the idea that as tax rates rise beyond a certain point, tax revenue declines.  It makes sense at the extremes; a tax of 0% raises zero dollars.  A tax of 100% also raises zero dollars.  No one works for free.

An example of this concept was displayed in Washington DC last month:

Wal-Mart Stores (WMT) no longer plans to build three stores in the nation’s capitol, after the city’s council voted to force large retailers to pay starting wages that are 50% higher than the minimum wage there.

The world’s largest retailer also said it will consider its options related to three other Washington, D.C., stores that are still under construction.

D.C., a wildly successful example of a city that lifts its poor and most fragile citizens out of poverty:


has once again created a law that really proves who is waging a “war on the poor.”

It isn’t the conservative whole embraces the free market that “hates” the poor, no.  Rather, it’s the intellectual liberal that “hates” the poor.  How else to describe the mentality of a people who vote to force job creators out of the market?

You’ll probably never get rich at Wal-Mart, but a job there is better than not a job anywhere.

Taxation And The Laffer Curve

This has been on my stack for some time.  I came across a story after reading a post by Dan Mitchell of CATO:

CIGARETTE-smuggling continues to soar in Ireland, with new Department of Finance figures showing that tobacco excise tax receipts are falling dramatically short of targets, even though taxes have increased and the number of people smoking has remained constant at 29 per cent of the population.

I especially enjoyed the assumed fact that economic gain made by the voluntary trade in an open a free market somehow first belongs to the government:

What Fianna Fail TD Niall Collins called “Premiership-style criminality” is behind the latest upsurge in smuggling, which is costing the state hundreds of millions in lost revenue.

Not one pause at the idea that the profits realized by selling tobacco from those who have it to those that want it should first be the property of the sellers.


Lefty Has A Friend

More on California taxes.

I posted on Monday that Phil Mickelson has had enough of the confiscatory powers of the state:

 And now California is about to.  When you tax the living snot out of people they are going to react.  They’ll either move or quit.

And that results in $0.00 tax revenue.

It’s really not rocket surgery.

Perhaps the only thing more frustrating than a government that confiscates so much wealth is the fact that it is so predictable:

…but when pressed during his interview Tuesday, here’s how Woods responded:

“I moved out of here back in ’96 for that reason. I enjoy Florida but it was also…I understand what he was I think trying to say. I think he’ll probably explain it better in a little bit more detail.”

When California takes 13.3% and Florida takes zilch the calculus is pretty simple.

Laffer Curve: PGA Style

Imagine a curve.  On the left hand side the value is zero.  Then, as you move from left to right, the slope goes up peaking somewhere then slides down back to zero.  That’s the Laffer Curve.

If you tax income at 0%, you realize $0.00 of tax revenue.  If you tax income at 100% you will also realize $0.00 of tax revenue; no one works for free.  In between is the sweet spot.

And it appears that, for Lefty, a 63% take is just too much:

LA QUINTA, Calf. — Phil Mickelson started his 2013 PGA Tour season at the Humana Challenge in partnership with the Clinton Foundation with a tie for 37th place. But after a final-round 66, Mickelson did more than hint that the 2014 season may see some big changes for the World Golf Hall of Famer.

“Well, it’s been an interesting offseason. And I’m going to have to make some drastic changes,” Mickelson said at the Palmer Course at PGA West in La Quinta. “I’m not going to jump the gun and do it right away, but I will be making some drastic changes.”

And what changes might he be making?

PHIL MICKELSON: Well, it’s been an interesting offseason. And I’m going to have to make some drastic changes. I’m not going to jump the gun and do it right away, but I will be making some drastic changes.

Q. Meaning leaving from California?

PHIL MICKELSON: I’m not sure.

Q. Moving to Canada?

PHIL MICKELSON: I’m not sure what exactly, you know, I’m going to do yet. I’ll probably talk about it more in depth next week. I’m not going to jump the gun, but there are going to be some. There are going to be some drastic changes for me because I happen to be in that zone that has been targeted both federally and by the state and, you know, it doesn’t work for me right now. So I’m going to have to make some changes.

And why does he think he needs to make these changes?

PHIL MICKELSON: Yeah. I’ll probably go into it more next year or next week. But if you add up, if you add up all the federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate’s 62, 63 percent. So I’ve got to make some decisions on what I’m going to do.

France learned it.  And now California is about to.  When you tax the living snot out of people they are going to react.  They’ll either move or quit.

And that results in $0.00 tax revenue.

Laffer Curve – California Dreamin

California is broke.  Way broke. And spending is the problem.  So what did California do?  They enacted new laws calling for new taxes on the rich:

The big state tax news is that California voters said to sock it to the rich–specifically those with income of $250,000 and up. California Proposition 30, which Gov. Jerry Brown’s budget and public education in particular depended on, passed.

Proposition 30 creates three new upper income tax brackets for the next seven years. For example, folks with $250,000 to $300,000 a year in income will pay 10.3%, up from 9.3%. The new top income tax rate–for folks with income of $1 million-plus–will be 13.3%, up from a current top rate of 10.3%. That eclipses New Yorkers’ combined state and local top rate of 12.7% and Hawaii’s top rate of 11%. The income tax hikes are retroactive to Jan. 1, 2012, but the extra bill isn’t due until April 15, 2013.

The expected result?  Well, if past results can predict future ones, I would expect that California sees more people leaving:

Nearly four million more people have left the Golden State in the last two decades than have come from other states. This is a sharp reversal from the 1980s, when 100,000 more Americans were settling in California each year than were leaving. According to Mr. Kotkin, most of those leaving are between the ages of 5 and 14 or 34 to 45. In other words, young families.

Meanwhile, taxes are harming the private economy. According to the Tax Foundation, California has the 48th-worst business tax climate. Its income tax is steeply progressive. Millionaires pay a top rate of 10.3%, the third-highest in the country. But middle-class workers—those who earn more than $48,000—pay a top rate of 9.3%, which is higher than what millionaires pay in 47 states.

People aren’t gonna put up with it; they aren’t going to continue to work harder for less, pay more for smaller houses and face ever increasing costs associated with energy and transportation.

The Laffer Curve wins again.

Laffer Curve – Who Is John Galt

So, it took, literally, 3 business minutes for our financial planner to e-mail us the morning after the election.  He suggested that we talk, asap, in order to adjust our portfolio.

The call occurred this morning and this is the takeaway:

  • We immediately stopped the auto investment of equities that rely on Capital Gains and Dividends.  The money that was designated for such investments will now be routed to cash
  • Begin the auto investment of purchasing municipal bonds.
  • Develop a plan to determine how much of our cash position should be allocated to those muni’s in a lump sum purchase.
  • Develop a plan to determine how much of our equity position should be sold to protect our risk to the market.
  • Review the household budget and identify the cash flow impact of maxing out 401k contribution.
  • Initiate a tax exposure picture at key levels of income.
  • If our salary  hits a level that triggers negative tax implications strongly consider giving the money away to reduce our taxable income to more favorable conditions.
  • Consider acceleration of retirement.  In essence, negotiate a more work/life balance friendly role at the office in exchange for less money/salary.  Enjoy life more and stress less while maintaining the ties to the corporation until such time as a higher income is better protected.

The advice was jarring.  The analysis was clear, direct and immediate.  The market’s reaction to the election was negative and complete.  Investors all over America were having conversations just like this one.  A massive sell off is underway with people moving money out of equities and into safer tax free vehicles like the bonds mentioned above.

Or just getting the hell out of the equities and sit on the cash.  And wait.

And that wasn’t the most chilling advice, that came in the later recommendations.  The first was somewhat humorous and carried an element of a gut reaction:

If the government is going to take 40% of your property move out of the way of that and just give the money to your favorite charity.

Seriously.  Just give it away.  The thinking is that I’m really only out 60 cents on the dollar and the charity is much more efficient at handling the money than the federal government of the United States.

But it was the third piece that really got me.  The advice was to “Go Galt.”  Negotiate, in essence, a demotion at the office in order to reduce the salary to a more friendly level and have more time to enjoy the things we might be pushing off or rushing through.

Just quit and walk away.

My wife and I hold jobs that are incredibly specialized.  The work we do, the hours we allocate to that work and the degree of competence is exceptional.  In the case of my wife I’m simply reflecting fact and you’ll just have to believe me.  As far as MY level of expertise goes, some of you may have your doubts based on the content and style of this blog; I don’t blame you that discretion.

If we did leave, the jobs wouldn’t be back-filled; they’d be absorbed.  No one would get promoted as a result.  The company would be out our production and expertise and the economy would be out the money we now couldn’t spend because we aren’t earning it anymore.

Now, for the Laffer Curve.

Let’s pretend that I’m right smack dab in the middle of the 28% tax bracket.  If I double the 401k contribution we make I will reduce my tax exposure by $7,929.  That means the government gets $7,929 x 28% = $2,220 LESS than they would have had we not gone and elected this unqualified train wreck of a President.

Not to mention the 28% of the money they lose if I just give it away.  Or the 28% they lose if I take a lower salary.

And if I DO increase my 401k contribution that means I’ll have 8 grand a year less to spend on just random stuff here in North Carolina.  It’ll mean fewer dinners out at my favorite pizza joint.  The BBQ shack down the road?  Out my business.  Ice cream for the kids and coffee at the local coffee joint?  Gone.  Jeans will have to last a few months longer, there will be fewer books paid for and less craft beer from the local beer store that just opened around the corner.

All this on top of the losses they have already incurred as a result of me investing in tax free municipal bonds. [Which, by the way, is how people like Romney get to such a low tax rate – they invest in tax free vehicles.  The nerve, right?]

Any money that Obama THOUGHT he was gonna get as a tax hike has actually resulted in a net LOSS to the coffers of the Federal Government.

But hey, Obama knows better than Romney in things like tax policy and how to increase revenues.

Good job America!

Romney’s Tax Plan

A recent report from the Tax Policy Center is showing that the Romney tax plan will result in an added tax burden on folks with the lowest incomes:

Our major conclusion is that any revenue-neutral individual income tax change that incorporates the features Governor Romney has proposed would provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers.

I haven’t read all of the report nor have I taken much time to study the plan offered by the Governor.  However, the broad brush strokes seem to be that there would be a 20% reduction in the tax rate at all tax brackets.  Further, Romney would broaden the base by eliminating deductions.  Last, Romney claims that his policies would spark the economy into 4% growth as opposed to the anemic sub 2% that we’ve grown accustomed too.

It should be no secret that I’m a small tax small spend kinda guy.  So I’m a little concerned that the main thrust is surrounding tax rates and not spending rates.  Cutting taxes is fine, but unless we shrink government, we’re only left with larger deficits.

I’m also a big believer in the concept of the Laffer Curve.  This is the idea that tax rates of 0% and 100% will result in the same amount of tax revenue.  And that as tax rates increase from 0% more and more tax revenue will be generated until a peak is hit at which point any further increase in the tax rate will result in lower revenue.  I think this is true.  It’s important to emphasize the concept of both sides of the curve and I think that Romney may be forgetting the 0% side and arch of the philosophy.

I’m not so optimistic that we’re sitting on the exact right peak right now and that either a tax hike or a tax cut would reduce revenue.  But I think there might be better ways to spur the economy without introducing tax cuts.  For example, end this continued nonsense surrounding the extension of the Bush tax cuts.  Make ’em permanent and move on.  The taxes in Obamacare?  Remove them too.

Right now, I think that tax certainty would be a sufficient spark to the economy and one that could generate the 4% growth Romney is targeting.

I’ll leave the discussion with one caveat.  I think that we need to reduce our corporate tax so that we’re among the most competitive in the world in this space and not the worst in the world.  Further, I would edit the code to say that all earnings realized in a foreign nation and taxed at the national rate can be brought to America without being subject to further American corporate taxes.  It’s hard to defend the practice of taxing money earned in France, using French -ahem- roads and bridges and then taxing that money further for the construction of American roads and bridges.