…continuing our conversation in the Economics of Taxation series (part 2)
A European Generation ‘E’ enquiry – (‘E’ for employment)
Referring to our previous article entitled ‘The Economics of Taxation’, today we elaborate and flesh out the basic ideas around taxation.
The basic idea is that any form of taxation becomes a drain on productive resources and at some point counter productive in attempts at balancing the government budget. For a fuller explanation of the effects of tax rate rises see the Laffer Curve analysis and the Cato Institute’s Dan Mitchell explain the Centre for Freedom and Prosperity’s view on Fiscal policy.
Two specific points are made by Dan Mitchell in his explanation, which bears thinking about:
- We don’t necessarily want to be at the point on the curve where government revenue is maximised, due to other factors such as the disincentives of maximising tax declaration by tax payers or the cost of collecting that revenue in the first place (sub-optimisation effects)
- Growth (in the economy) incentives fall well short on the upward side of the Laffer curve. In plain English this means that economic growth is maximised somewhere where people have the incentive to retain as much of their hard earned income and that point is somewhere well before we reach the Government Revenue maximising point. (The second Laffer Curve graph above captures this point in a more visual and understandable format). At point D on the curve economic growth will be maximised and note how it still falls well short of the Government Revenue maximising point B.
The behavioural question that fascinates us at theMarketSoul ©1999 – 2011 is how come citizens in Europe are able to tolerate so much more of an overall higher tax rate burden than our cousins across the pond in the United States?