The Laffer Curve has gained new attention with tax hikes fast approaching. The thesis behind Arthur Laffer’s insight is simple: no tax revenue is produced when the tax rate is 0% (obviously) or 100% (who would earn income they will never see?). Empirical studies have sought out a revenue maximizing tax rate, and while certainty in economics is rare, a point of rapidly diminishing returns appears when local, state and federal tax rates are more than 50% of earned income. We are now at that point in California, New York and Hawaii.
Setting aside the troubling political / moral question of whether the government should extract the maximum possible amount from its citizens' labor (or be guided by a better light), the Laffer effect has credible components:
Work Incentives. The first 10 hours of a 50-hour week feels much different than the last 10 hours of a 70-hour week. A combination of higher tax burden and exhaustion accelerates the Laffer impact. Economists have pointed to studies showing reward and exhaustion level correlate to reduced output, particularly at higher income levels.
Avoidance Efforts. When the gap between taxes taken and services received grows, so does the desire to game the system, which increases collections costs and reduces net revenue. Few people believe they should get roads, schools, police, courts or other public goods for free, but spending on transfer payments (to the politically favored) diminishes incentives to interpret rules in favor of the tax collector. Cheating in high tax countries is well documented. The ability of a growing number of workers to shift their income timing and type has made high marginal taxes less effective. Most “millionaires” do not file as such in many successive years, and when tax burdens increase, so does the attractiveness of shifting revenue type and tax jurisdiction. Think of LeBron James' move to Florida or the recent startling statistic that two-thirds of Britain's "millionaires" somehow disappeared after the imposition of a 50 percent wealth surcharge.
Investment and Growth. High marginal tax rates target money most likely to be invested in new endeavors. These are precisely the “saver” dollars so cherished in growth-centric economies. $25K extra from someone making $500K may not be an individual burden, but shifting those funds via taxation to regulatory oversight or transfer payments slows growth. Less growth causes long term tax revenue to fall. The Rahn Curve (named for economist Richard Rahn) indicate that government expenditures of 15% to 20% of GDP equate to maximum levels of growth in the economy. Tax rates that produce larger government than this would combine with the individual Laffer effect to reduce tax revenues over a period of time. The economic booms following the JFK and Reagan tax cuts are often cited as examples of the marginal impact of investment dollars on long term growth. Reagan's 28% top marginal tax rate (and code simplification) economy managed to produce almost 75% more revenue ($909) than Carter's 70% top marginal rates ($517B aggregate) some 8 years later.
As we look down the barrel of another reload on the search for "revenue", Mr. Laffer may well have the last laugh.
After getting trounced by Big Bubba and Big Data in the 2012 election, libertarian-leaning Republicans can look to a few silver linings:1. Obama won the popular vote in 2012 by 2.5% versus almost 7.5% in 2008. 5% of voters had a "learning moment" and this is encouraging considering how few generally pay attention and how super-effective the Big Data driven GOTV effort was for the Government Union / Democrats. My socially liberal wife got called 3 times to vote on a pro-public union measure. She voted against with the benefit of my insights but many of her friends had no idea. I got no calls. We got crushed tactically and spanked from a PR standpoint by bad apples (Akin, Murdouck). However, every poll shows that our ideas remain the winning ideas. People think government does too much, wastes too much money, and needs real leadership.
2. This reminds us that incumbents are REALLY hard to beat. The system is heavily rigged in their favor. As unhappy as voters were with GW Bush in 2004 on the Iraq war, they still gave him a second chance. The Bush margin from 2000 to 2004 was + 3.5% versus - 5% for Obama. An aggregate of 8.5% is not nothing in the persuasion business, particularly when you consider that Democrat voter participation only dropped 2%. We may have had the enthusiasm gap, but they had the go to market gap with their Bubba-driven robo calls and public union funded GOTV. We're now "Wide Awake" as Katy Perry might say.
3. The legacy media is dying. True, their failure to press on the Petraeus Scandal, the Benghazi debacle, the arrest of Nakoula Nakoula, labor rate participation plummeting, stock market stagnant, Bernanke bubble, food stamps soaring, health care costs skyrocketing, gas prices doubling, California bankrupt, etc. cost the election, but in that light, Romney did well and he has ONLY the new media to thank. Under the legacy media, the result would have been much, much worse.
4. The problem isn't the American people (though I have concerns). It is our celebrity journalism culture which went all in for one guy. Whatever you might say about Romney, he sucks as a celebrity (Mormon grandfather? Who is going to cast that one in Hollywood unless he has plural wives). Obama was a Black Swan and a rare celebrity. They don't make them like that every day, and Dems have no more in the wings.
5. Gary Johnson won 1M votes, meaning that the libertarian vote PLUS the most unabashedly pro-market, small government Republican ticket since Reagan landed only 1% shy of ousting a sitting president riding a wave of post-Sandy "bomber jacket" propaganda and plump Republican sidekick. Millions of robo-calls went out from Clinton to convince people that Obama was a "moderate" -- no small feat, even for a practiced liar. And NEVER UNDERESTIMATE BIG BUBBA.
6. Things that cannot go on forever, will not. The Bernanke Bucks economy will collapse as student loan defaults and a slow down in mortgage refinancing melt the Fed balance sheet. The country will go in to a recession with the burdens of Obamacare, DoddFrank, Fiscal Cliff, Manufacturing flight, small business taxation, etc. Inflation will soar on any product modestly hard to substitute. 2014 could well be the year we oust many, many Democrats and rightfully tarnish the new leftward Obamacrat brand the way Bush in 2006 created a low water mark in the Republican brand.
One final point: it is absolutely essential that we continue to recruit the Ted Cruz, Susanna Martinez, Mia Love, Marco Rubio, Herman Cain and other diverse spokesperson for our small, effective government values.At some point, 6 white guys bloviating about racism on MSNBC / HBO sitting across the table from 6 women, latinos and African Americans will ring hollow. It does already. Our ideas are the winning ideas. We just need attractive spokespeople and an ORCA that swims !
After recent euphoria, the Bay Area is in for a serious hangover.
The party was epic: The SF Giants won a first World Series against those Bush-infused Texas Rangers. Meanwhile, in the 2010 Elections, the blue state locals let the red state teetotalers know they had no intention of calling it a night and joining the Tea Party in the rest of the country.
Unfortunately, reality is about to hit hard. As The Wall Street Journal put it: California has become the Lindsay Lohan State. Meanwhile, the NYT is reporting that bondholders are balking at the bill.
In the end, the Giants' win was epic, but still vicarious entertainment. And what Tea Party goers might lack in spelling skills, they make up for in true insight: it is time to sober up.
By objective measures, California's state government has failed. California ranks at the bottom of every scale of accountability. Despite our temperate climate, we have the nation's second worst roads and bridges. We rank 36th for crime incidents and public safety. Our public education lags well behind the nation. Public development is moribund and critical public works are interminable. Environmental stewardship is stagnant. Our debt is unsustainable without federal bailout funds, which are not coming from the next Congress. Public pension obligations are dramatically underfunded, drawing billions of our tax dollars that should go to services.
The only thing we know for certain: California’s failure is not due to a lack of government resources or the energy and commitment of its people, but to the gross negligence and a failure of civic duty by its leaders. Our sales tax (10%), property taxes (14 mils), and income taxes (10%, including ordinary income rates on capital gains) rank as the second most onerous in the nation. Fees, fines, fares, and tolls are ubiquitous and historically high. It is official: Californians pay the most and get the least for their money. Just how is it we suffer some of the worst government management since the days of Caligula?
A large part of the problem is the inmates run the asylum. Incredibly, public unions use our tax dollars by the millions in campaigns to defame anyone who comes close to threatening what can only be described as a quasi-criminal enterprise. $900,000 per year salaries for Bell city managers, $750,000 per year for Alameda county health care administrators, $8 million pensions for San Francisco assistant police chiefs. These are no longer public servants. They are public malefactors. If it bothers me that Buster Posey or Tim Lincecum made millions, I can avoid the Giants. If I didn't like Meg Whitman's salary, I could have stopped using EBay. A problem with Carly Fiorina's management? I could change jobs. But if I find the management of California's public bodies outrageous, my only choice is to uproot my entire family, career and business and go to another state. Unfortunately, both inside and outside of California that equation has become all too apparent.
As a political culture, California has always had an eclectic blend of transplanted liberalism, unbridled personal ambition, and a native Western libertarian streak – both the intellectual and cowboy sort. With physical beauty, a savory climate and energetic transplants from across the country and the world, we could get it together when needed. We put the past aside and planned the future – often the future of the world. History? Tradition? Not as interesting when you have the next, next thing. Or at least Twitter and Zynga. Unfortunately, historical amnesia has a price. In the face of adversity, amnesiacs lose perspective, regress, cling to illusions, and draw blanks. Their imagination looks not to the travails and triumphs of the past for bearing and strength, but to the fickle flirtations, impulses and “why not me” envies of this year's accidental successes (movie stars, dot com wonders, sport titans). When these infatuations fail, as they invariably do, regression sets in.
The 2010 California electoral results were just such an exercise in collective historical amnesia and failure of nerve. Californians were offered up two dedicated, accomplished women (Meg Whitman and Carly Fiorina) with desperately needed leadership and management talents. But they saw only the risk and not the reward. This was a moment when California society took one of those regrettable turns. Otherwise capable of so much innovation, creativity, and sense of challenge, Californians sought solace from the economic downturn anywhere but in the real world of cause and consequence -- the daily stuff of leaders like Meg and Carly. In fairness to the voters of California, Meg and Carly did not do nearly enough by way of prior public service (as opposed to business) accomplishment to prove that either of them was a risk worth the taking. Meg Whitman couldn't even be bothered to vote.
Still, the case against Barbara Boxer and Jerry Brown was much stronger. As placeholders for nearly six collective decades in failing organizations, they were simply instruments of collective denial. This pair has accomplished little for others in their aggregate 140 years on the planet. A pet project here or there. A huge dose of self-interest and corruption everywhere else. They represent anti-leaders – drab wallflowers that have achieved significant personal comfort despite mediocrity. They maintain their station by incessantly tearing down their betters and playing to regressive elements. Like the segregationist Democrats of the old South, change is anathema and hopelessness pervades their efforts. Will the man who gave public unions collective bargaining be the one to undo their disastrous consequences? Very doubtful.
One spring leaf of hope on the horizon came from Proposition 20, which the voters overwhelmingly approved. One might debate this particular solution on the issued of redistricting, but the fact is Californians know the patient is sick and dying. They know Sacramento is simply not a place that can be trusted with fundamental liberties. That is a sad commentary, but at least people are aware of the disease.
My fervent hope is that we can punch the accelerator of real change before it is too late.