Modeling the tax burden on reduced GDP

On doing some socialist playthroughs, I deduce things are a tad too easy :smiley:
It occurs to me that the game is not currently modelling any effect of higher taxation in general other than happiness of various groups.

For example, you can max out income tax and the worst effects are that capitalists are upset and that wealthy people have less money. Ultimately these taxes also act as inputs to brain drain and tax evasion…but thats it. This seems wrong!

There is definitely a case that higher taxation can result in reduced economic activity and therefore reduced tax income. This is famously the laffer curve, which OH MY GOD people argue about a lot, but I think we do need something like this

To put it in simple terms, if the tax rate goes up to 80%, then people who were considering taking a risk on expanding their small business (for example) might just not bother, because the perceived upside is less than it is with a 40% tax rate. Also people will turn down overtime/extra work at weekends etc if the extra income puts them at a tax rate that means their actual take-home after tax is low.

The result of this is less economic activity and thus less GDP.

The easiest solution (maybe the best) is simply to introduce the laffer curve as an impact of various taxes, such as Income Tax etc on GDP.
I am wary of introducing un-needed complexity but this does need modelling I think.

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would this be mediated through productivity? ie high income tax now directly lowers productivity

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Progressive taxation if done properly works like in this example:
0 - 10 000 is 0% tax
10 000 - 30 000 is 10% tax
30 000 - 150 000 is 30% tax
and so on, bands, steps and tax percentages may be different.

If you earn 150 000, then you pay nothing for first 10 000
Next 20 000 is 10% tax, so you have to pay 2 000.
Last 120 000 is 30% tax, so you pay 36 000.
You paid 38 000 out of 150 000.
Effective tax rate is 25,3%.
Marginal tax is 30%

That is effective tax rate is always lower than marginal tax rate, unless your income is in first band, or last band income is vastly greater than rest of earlier bands.

I guess lots of people misunderstand progressive taxation, where going to next band means all income being taxed at marginal tax rate for this income.

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That’s dead-weight losses, not the Laffer curve. The Laffer curve is that if you crank taxes high enough eventually they will reduce GDP enough that they make less money for the government.

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Been telling you that for a while now :stuck_out_tongue:
Though it basically doesn’t matter what direction you go. All of them are quite easy.
Socialist is just particularly easy because most groups tend to like stuff Socialists would do, so there’s even less of a chance of being assassinated if you play quite aggressively.

But one big change would simply be to, as mentioned before, retire Flat Tax have a progressiveness slider for Income Tax instead.

Diminishing Returns (which the Laffer curve would be a form of) is a thing the game needs in general I think. Almost all opinion changes ought to be non-linear and asymmetric:

  • if the opinion is affected positively, people would care quite a lot at first but then pushing your policy further would barely move the needle anymore, as what ever need a given policy is meant to address is being satisfied.
  • if the opinion is affected negatively, people might care about the principle of the thing quite a bit, but then any raising isn’t that bad, until you go quite extreme, in which case opinion effects would also be much more extreme.

Probably not true for every policy. Gotta think that through case by case. However, definitely true for more policies than currently work that way.

And similarly, effects would also grow in such a manner. Pitiful funding does basically nothing, then you get into a very strong regime, and then going even further will not actually improve things much, as you run out of production- and human capital capacity to even make use of all this money.
That’s currently a problem for certain charities which have actually been overfunded in the wake of BLM protests, say. (They are also subject to certain regulations which mean, if it’s not part of their mission statement, they cannot legally use funds to do it, so the problem is often, like, a charity says it handles Michigan, but it’s now so flooded with cash, Michigan cases are basically dealt with for the time being, but they can’t just go “oh let’s cover other parts of the US”)
It’s also an issue super rich wanna-be philanthropists run into. If they want to do things right, they run into issues where they barely can spend their money faster than they gain via interest. Which is insane. (They totally could go faster at the cost of risking inefficient or, worse, corrupt charitable efforts)

If that’s the case then that’s a great argument for also adding a Land Value Tax which is supposed to be optimal in terms of dead-weight loss. https://en.wikipedia.org/wiki/Land_value_tax

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An interesting study was reported on in the Economist that helped shine some light on the curve. It would definitely be needed in some form to prevent maxing out stuff, though the ideal peak tends to vary from country to country it seems.

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Looks like the Laffer curve would be extremely hard to model, requiring various extra stats you aren’t really modelling yet.

Or you could just slap a static shape on it and be done, but that seems hacky.

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A bunch of taxes in the game already have Laffer curves, so I doubt it. (If you crank tobacco or carbon taxes high enough they will eliminate their sources of revenue and stop making money.)

My point there was that you don’t have to hit the right side of the Laffer curve for the tax rate to be high enough to cause negative effects. You are still taking money out of the economy and out of people’s pocketbooks, and given the effect of dead-weight losses, you’re taking more money out than the government is receiving in tax revenue.

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Now if GDP just approaches close to 1 as you implemented those logistic functions, I think just increasing their effects on GDP would do that.

GDP counts consumption, so increasing sales, income and payroll taxes would decrease GDP - less income spent on buying stuff.

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I suppose that’s right, but honestly I’m also not sure that’s realistic.
In particular, aclohol tax ought to be quite avoidable. It’s not actually that hard to make your own blackmarket moonshine. Tobacco would be harder since you gotta have access to the crop.

But anyway, even if those examples work, income tax is a very different manner and all sorts of complicated variables play into how exactly this hypothetical curve ought to look. Models seem to vary wildly from suggesting an optimal tax rate as low as in the 30s to one as high as in the 70s, and it’s affected by how strongly companies would react, how easily labor can move around, how separable a public good is from labor supply, etc. etc.

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The tobacco tax example isnt that people grow their wn, but that people are way more motivated to try to give up smoking when it costs them $100 a week than when it costs them $20 :smiley: (also the ROI on aids to quit smoking like vaping / patches etc goes up).

I’m definitely talking about the laffer curve, and I think its a good point that the alcohol and tobacco axes (also actually car/gas tax) already effectivey model this in the game without complaint.

I think adding a simple exponential curved reduction in GDP with higher income and corp tax is worth doing, and justifiable. I just dont relish arguing about it on steam forums, because its almost a meme that ‘the laffer curve has been disproven’, whereas I think in practice, its just that people disagree on where the curve lies (and it depends on so many factors that its like nailing jelly to a wall trying to find it).

Income tax already scales its revenue by GDP, so hopefully most players can look at the fancy new chart hen hovering over the income tax->GDP effect and see that there are diminishing returns here.

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I think high taxes should reduce productivity but should not directly impact GDP. Productivity then reduces GDP correct?

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Nah. Less overall production if anything increases individual productivity. Unemployment shows the same effect.

I know, yes. My point was more so, that, if people could grow their own, they could literally circumvent this tax by, well, making their own for private use.

With alcohol this is, in fact, very straight forward with tools almost anybody could get their hands on. Just need sugary water and a distillery. Which is can also be cobbled together from other stuff.
Heck, even aged alcohol is possible to mimic in a fraction of the time if you go for the expense of getting an ultrasonic cleaner which can, it turns out, speed up the good part of the aging process, letting you make liquids taste in minutes like they’ve been stored in wooden barrels for a hundred years. That’s less of a thing people have around, but it’s not exactly unaffordable for a middleclass person.

Effectively, you can thus pretty much entirely circumvent alcohol tax, and a high alc tax would certainly mean a blackmarket for people selling this stuff under the shelf, much like prohibition would cause.
Tobacco, at a reasonable scale, would be more difficult, because it requires a specific plant that requires specific climate and large plants could be spotted from space etc. - For personal use a small treehouse might be enough though.

Exactly. Any choice you make here would be quite arbitrary, and either barely move the needle in terms of difficulty, or just make things more difficult for unclear reasons.

The laffer curve has in a sense been disproven: It’s meant to be a simple pedagogical example with way too many simplifying assumptions. In truth such a relationship surely exists, but the exact shape depends on lots and lots of factors and, in fact, some policies, some of which might be considered socialist, may well push up the ideal tax cap. And it’s probably not at all straight forward to figure out which policies ought to change that curve.

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Well the thing is, the game has to (in order to be fun and playable) be a game of very simple examples and simplified relationships. I think its clear that raising taxes forever is not a free lunch, and ultimately creates disincentives. We can cal that a laffer curve, or something else, and maybe say it need additional multipleirs or inputs, but I think putting in an approximation of it right now will make the game better because currently we have… nothing :smiley:

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That is fair. It certainly is too easy, currently.

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I have found that obscenely high tax rates have no drawbacks, to the point where it’s just plain silly NOT to institute heavy taxes. In my most recent game I had:

Income Tax 65%
Sales Tax 20%
Cap Gains 50% (Max)
Corporate Tax 25%
Inheritance Tax 30%
Automation Tax 75% (Max)
Punitive Wealth Tax 25%
Punitive Superstore Tax High (Max)
Junk Food Tax 90% (Max)
Drug Tax 75% (Max)
Tobacco Tax 50%
Alcohol Tax 75% (Max)
Internet Tax 40%
Grad Tax 75% (Max)
Mansion Tax 40%
Property Tax 25%
Luxury Tax 20%
Payroll Tax “High”
Diverted Profits Tax (Max)
Frequent Flier Tax (Max)

With maxed out public tax returns and tax shelters I had all those taxes running with no drawbacks whatsoever. No tax evasion, corporate exodus, brain drain, ect. It generated enough income to basically fund anything I wanted and still run a surplus, and I won 100% of the vote.

Changing the tax system would definitely fundamentally change how the game is played. As it stands, the most effective strategy is to just immediately raise taxes as high as possible and then raise enough political capital to instill max policy after max policy and you’re guaranteed to win every time.

On the flip side I’d argue that very high taxes on alcohol, tabacco, junk food, and C02 shouldn’t completely end their use like they do. There are countries in real life that have car taxes of 100+%, but lo and behold, people still buy cars their. Sure, fewer people can afford them, but not everyone is going to suddenly give up a vice they’ve been enjoying their whole lives simply because it’s more expensive.

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Another place taxes could be given some more bite is in the personal income system. I suspect that as the system stands now the tax->policy loop is positive sum. Which is to say, a program will boost a voter’s income more than the tax required to pay for it costs that voter. So a massively overtaxed society will be very rich rather than very poor.

I think the biggest issue is that tax evasion is an all-or-nothing red bubble scenario, which doesn’t really make sense. Tax evasion should be an always-present blue-bubble metric. It stands to reason that there will always be at least a small level of tax evasion even in low-tax countries. As income and payroll taxes increase more people will work under the table to avoid paying them. As sales taxes increase more people will trade informally rather than through merchants. Tax evasion isn’t something that either happens or doesn’t, it’s a metric.

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Was going to make a post about this, actually. It would be a sim value which actually made sense to go in the tax area. I’d also say the membership of the self-employed group should increase tax evasion too.