On the topic of the laffer curve

I got questions about this, so i thought I’d explain in depth:
For those new to economics the laffer curve can be read-about here: en.wikipedia.org/wiki/Laffer_curve
I’m not going to debate the validity of the theory, merely describe how it is implemented (and adjustable/moddable) within the game.

Basically the laffer curve is saying that higher taxes may bring in less income than lower taxes, at some ‘hard-to-define’ point. In other words, you can set the tax rate too high if you goal is to raise money for the state. At first glance it may look like the laffer curve is not modeled in Democracy 3, but it is. If you look at the slider for income tax, you will see that at high levels, it brings in more money than at lower levels, which might seem to imply a non-laffer simulation. However, the values shown below the slider are simple calculations, not forecasts based on full models.

If you set income tax punishingly high, more income will be raised, in the immediate term. However, this high rate also acts as an input to ‘bad’ situations such as brain drain (I can see an argument for suggesting it should affect corporate exodus too). If the brain drain kicks in, there will be noticeable hit to GDP (12%!). This lower GDP will affect income raised by the tax, because almost all taxes in the game are in some way scaled by GDP, in terms of what income they raise. Therefore, it is entirely possible (and indeed likely) that when looked over a medium to long term, a higher tax rate brings in less revenue. Of course, this is only one argument. You may wish for higher income tax rates for non-revenue reasons such as political popularity with socialists or a more equal society.

So in short, the laffer curve is in the game, albeit in a fairly complex and ‘binary’ way. You could easily make a ‘laffer mod’ that more directly introduced a gentle curve to GDP from higher rates of income tax, without using the situation-triggering mechanism.
Hopefully that makes sense :smiley:

I certainly noticed this in the games. In Democracy 2 I modded things so that the higher tax the more GDP got reduced and lower taxes meant a better GDP. The more money people have the more they’re going to spend. I’m glad there’s an editor now because the game crashing when I’d mod is what killed off my interest in Democracy 2 very quickly, a great game on balance but an epidemic would upset everybody so you had no choice but to increase state health spending hugely and right away or lose.

Maybe if the GDP decrease from taxation goes exponentially higher, it kind of simulates it, right?

If would have to be pretty drastic I think.

I’m not sure the theory is even valid in the first place. Empirically, one seems to forget the entire period of economic history in the U.S. after the Second World War, when virtually the entire war debt was paid off under that crazy leftist radical, Dwight Eisenhower, when the rich were taxed at a whopping 90%. It didn’t seem to stagnate the economy when the affluent society was established and economic prosperity peaked after during the 1960s. And needless to say, tax revenues rose.

Ah, but the Laffer Curve doesn’t state that lower the tax, the higher the revenue. It only states that after raising taxes at a certain point, the revenue begins to fall.

The very rich simply found ways not to pay alot of taxes.

But unless you reach the point on the laffer curve in this game the income tax has no noticable negative effects others then some votes lost. It’s free money.

I wouldn’t say it’s entirely free, as the higher taxes increases the probability of brain drain or corporate exodus kicking in, which will definitely sink GDP and result in less tax revenue overall.
Plus anything that upsets capitalists upsets the media, and can lead to a media backlash and thus a big popularity dent.

But unless a situation happens its free, and that ignores the macroeconomic reality.

How is it unrealistic for tax revenue to come in if you raise even a bit of the tax rate?

It all depends on your analysis. There are likely points on the tax curve where a rise in taxes just purely raises more revenue, and spots where the opposite happens. The problem is, no economist can agree on the exact shape of that curve, and it definitely varies by country and due to all kinds of other factors.

The laffer curve is properly named — it has been debunked as has the so called “efficient market” theory.

Economics is the publishing of political agendas that are hidden within known-false assumptions.

Perhaps you could start the game with the players choice of which false assumptions (s)he would like to play under.

We know that the Lafer Curve works. When you tax above 50%, tax revenue declines. When you tax below, revenue goes up. Proven by Reagan, seconded by Thatcher.
Even good socialists recognize this and try to keep tax burdens at 50% or less. In today’s world the wealthy will become citizens elsewhere and then they pay tax at a rate of 0%=brain drain.

What you describe is tax exile, not brain drain which is completely different matter. Unless you think all wealthy are intellectuals and all intellectuals are wealthy, then yes, it is the same thing.

Actually, revenue as a percent of the GDP did NOT go up under Reagan. It dipped slightly.

However, when Roosevelt DID raise the top marginal rate above 50%, Tax revenue rose to a historical high of over 20% of the GDP by the time he died.