Laffer Curve Revisited

Democracy 4
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@cliffski Time to revisit the Laffer Curve?

The guy who rediscovered it (Ibn Khaldun first came across it) states in this time article, “the laffer curve should not be the reason you raise or lower taxes”.

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Oh its a HUGE topic. I studied this stuff at university. Its really hard to say for sure what impact tax cuts or rises have on behavior. Its massively dependent on other factors, and the whole topic has become so massively politicised online, in that people assume:

You believe in the laffer curve == fascist
You disbelieve in it == communist

And there is way more nuance than that! Like everything in the game, its implementation is a very vague approximation of a huge number of real-world effects. Sadly you cannot do an A/B test of real world countries :smiley:

This bit:

Virtually every economics Ph.D. who has worked in a prominent role in the Bush Administration

Is very specific. It doesn’t represent the experience of the increases in income taxes recently in France, for example, or the massive income tax rates in the post-war UK. Countries differ widely, and the before/after rate of a tax change plus the level of other taxes, and current inequality rate all play a part. Also the industry mix and resulting differences in the mobility of capital are important factors.

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Thanks Cliff for explaining it so thoroughly! I had no idea! Do you think that LIS could also be a dynamic way of changing revenue (asides population)?

I didn’t know people thought you could be communist or fascist on how you implement this [ I never knew it was so politicized, I was trying to be neutral, using the creator’s own words! :slight_smile: ]. It seems so inoffensive an economic philosophy (although I can see how leftists could be upset with its implications on inequality).

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You are told that you are a fascist/communist so often that I think that you should be a NPC in Disco. :joy:

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I think the politicization is because leftists can see the laffer curve as an excuse not to tax the rich.

Its controversial because it seems counter-intuitive. Cutting taxes must surely mean less revenue! but obviously its way more complex. I think something that already is (maybe not perfectly) captured in the tax model in the game, is the fact that the marginal impact of a tax rate change actually changes depending on the rate.

That article even mentions this, saying that cutting the top rate from 70%+ down to 28% will increase tax revenue from the rich, but the same effect isn’t noticeable at a lower rate.

To put it more clearly:

  • If you raise the income tax rate for multi-millionaires from 40% to 90%, they all emigrate and take their businesses with them, resulting in less tax.
  • If you raise the income tax rate for the middle classes from 35% to 40%… you just get more money, because most people at that income level are not in a financial position to just leave a country for tax purposes.

I think we model this in the game, because taxes aimed at the top (mansion tax, luxury goods) will feed into a brain drain (the higher earners leaving), whereas general income tax rises have less of an impact.
Like everything in economics, its hugely variable. You could even model language as a factor. For example, if you speak English, moving to another English speaking country with lower tax rates is very easy for you from a cultural POV, so its harder to tax the English-speaking rich than it is for many others :D.

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Indeed! The advantages of empire!