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Monday message board (On Tuesday)

January 3rd, 2006

It’s past time for the Monday Message Board, but at this time of year it’s difficult to remember what day of the week it is. (Tuesday is easy since it’s one of the days we’re allowed to water the garden before 7am, hence an early start.)

Anyway, please post your thoughts on any topic. As usual, civilised discussion and no coarse language, please.

Categories: Regular Features Tags:
  1. Terje
    January 3rd, 2006 at 10:49 | #1

    I thought I would share this quote from Keynes in which he appears to advocate the merits of Laffer Curve type tax rate cuts.

    Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more–and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.

    Whilst I think the Laffer curve is an important concept, it does focus on the notion of finding the point at which “public goods” are maximised. Whilst such an exercise might be worthwhile the more important point is that at which “public+private goods” are maximised (or optimised). Clearly this point would be somewhere to the left of the Laffer curve maxima.

  2. January 3rd, 2006 at 11:52 | #2

    One word “Abramoff” – this story will be big in the weeks and months to come!

  3. Terje
    January 3rd, 2006 at 15:05 | #3

    I know that John Quiggin wrote an article in 2003 in which he pondered the result that might flow from the move by the “Congressional Budget Office” to do ‘dynamic scoring’ in regard to tax policy. Recently they published a paper on the topic.

    http://www.cbo.gov/ftpdocs/69xx/doc6908/12-01-10PercentTaxCut.pdf

  4. January 3rd, 2006 at 15:37 | #4

    Terje, one misleading thing about talking about the Laffer Curve is focussing on the optimum point. The thing is, this is one of the many areas where a liitle deviation is immaterial to the returns – the graph has more of a broad plateau than a spike, so it makes little difference if things are a little bit off.

    There are a couple of catches about that. One is that, for private firms, coming second is often not good enough, regardless of how little they lose by. That doesn’t apply here, for governments.

    The other is more serious. If you have any kind of feedback system, even a bureaucracy whose job it is to get more revenue when its masters demand it, what also counts is the marginal gain as they step up the rates. This levels off as you approach the optimum, and then reverses. It can lead things to get out of control for much the same reasons as some early attempts to break the sound barrier – on those aircraft, the control surfaces started to work the wrong way as speeds approached Mach 1.

    So a sound strategy is to get close to the optimum, but try to stay below it so instantaneous responses and adjustments still work.

  5. Terje
    January 3rd, 2006 at 16:03 | #5

    PML,

    Roughly speaking the laffer curve assumes:-

    1. Revenue = tax rate x GDP.
    2. GDP = f(tax rate).

    When ‘tax rate=0%’ then so does Revenue (arithmetic effect).
    When ‘tax rate=100%’ then ‘GDP=0′ and hence ‘Revenue=0′ (economic effect).

    Lets say that the Laffer curve looks like Uluru (Ayres Rock). The implications of higher taxes are then quite serious, because underlying the Laffer curve is the interplay of the arithmetic effect of tax increases and the economic (incentive) effect. We know that the arithmetic effect is linear so the curve shape you describe must impy a rapid early roll off in the size of GDP (ie a high economic effect). In other words ‘f’ represents a function quite sensitive to the ‘tax rate’.

    Whilst operating within the platue region of such a laffer curve a tax increase has nearly no effect on the output of public goods (ie no change in tax revenue) but a high effect on the output of private goods.

    Personally I think that most laffer curves for most nations are like Uluru. So even when operating to the left of the peak there are significant reasons relating to overall social well being to lower the tax rate much further.

    Regards,
    Terje.

    P.S. I broadly agree with your feedback analogy. In engineering we talk about underdamped feedback systems that lead to destructive oscillations.

  6. Ernestine Gross
    January 3rd, 2006 at 16:04 | #6

    Laffer Curve: The Laffer Curve is no more than a strictly concave function defined on the closed interval [0, 1] with a curvature such that the value of the function is 0 at the points (0) and (1).

    The Laffer Curve is at best a rough diagrammatic representation of the idea that if one exaggerates with one’s demands on people (eg work longer hours at declining hourly wage rates) the outcome may be disappointing.

    The Laffer Curve story works actually better when applied to hours worked per person than to taxation. Suppose [0,1] is a normalised ‘day’ (24 hours). The curve then makes sense at least to the extent that output is 0 when the number of hours worked per person is zero. The output is 0 when people work 24 hours per day because after a very short time (relative to their life expectancy and hence total potential productivity) people will be dead (please consult with medical doctors regarding the number of days people can work without rest and sleep).

    By contrast, the Laffer Curve story makes no sense in relation to taxation even at the point (0) and (1) because:

    a) The point (0) corresponds to no taxation at all. This would correspond to the theoretical model of a ‘competitive private ownership economy with complete markets’ (has never existed in reality during human history often described as ‘recorded history of western civilisation’ (ask Historians for more precise historical information; it is sufficient here to say that the period includes all the old knowledge which the neocons seem to use).

    b) The point (1) is difficult to interpret. The interpretation of the value of the function is “total tax revenue”. Is the total tax revenue at (1) zero because people worked 24 hours and died? But surely, this would only happen in an absolute dictatorship. In any case, whose tax payment behaviour is modelled by the ‘Laffer Curve”? Those people who have a choice to pay taxes or those who pay as they earn? Those who pay GST?

    c) What is the justification for the functional form – convenience of drawing the diagram with Window drawing tools?

    Re Keynes: My interpretation of the text you quote is that Keynes argued the objective of balancing the government’s budget by means of increasing taxes without regard to anything else can be counter-productive. This is an entirely different argument from anything that can be deduced from the Laffer Curve. Furthermore, Keynes’ analogy to the decision problems of firms seems to be a good argument against the accounting approach to business management which has become quite popular during the past 10 to 15 years.

    With due respect, it seems to me the neocons’ activities consist primarily of generating a lot of work for people who are confronted with their output. Shouldn’t they pay for this work generation?

  7. Andrew Reynolds
    January 3rd, 2006 at 16:17 | #7

    Ernestine:
    I suggest you have a quick look at Wiki on this – “At the other, where there is a 100% tax rate, the government collects zero revenue because (in a “rational” economic model) taxpayers have no incentive to work or they avoid taxes, and the government collects 100% of nothing.” I think it answers your point b) nicely.
    On c), like any economic graph, it has to be a combination of “best guess” and econometric analysis. As you point out, movements close to 1 have no real precedent – except in the case of regimes like North Korea and Albania under Enver Hoxha. Movements toward 0 are fairly common as a country collapses into anarchy.
    To me, at least, Keynes is advocating analysis similar to the Laffer Curve, Laffer himself attributes it to him – amongst others.
    On your last question, if we started attibuting the true costs of debate to the various schools, perhaps the communists should pay for the devastation wrought by their theories, the socialists for theirs etc. etc. etc. I think the neo-cons would end up being the least poor on this basis.

  8. Terje
    January 3rd, 2006 at 21:05 | #8

    Ernestine,

    I accept your introductory point which is why I don’t average zero hours work per day nor 24 hours per day. I think even the bible had something to say along the same lines as your point, suggesting that at least one day in seven should be reserved for rest.

    From what I have read Ethiopia taxes farm profits at 89% per annum which is close enough to 100% to be offensive (and cause routine starvation). And before Thatcher came to power in the UK so called “unearned” investment income was taxed at similar rates. Before the Kennedy tax cuts the top income tax rate was 91%.

    So I guess you are right. To appreciate the effects of a tax rate at 0% or 100% we have to speculate since no administration has yet proved to be that bold at either extreme.

    My interpretation of the text you quote is that Keynes argued the objective of balancing the government’s budget by means of increasing taxes without regard to anything else can be counter-productive. This is an entirely different argument from anything that can be deduced from the Laffer Curve.

    I have read and reread the Keynes quote and it is still just the Laffer Curve in words. In fact it seems explicit so when Keynes says “given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget.”

    He is not saying consider multiple factors before you increase taxes to balance the budget. He is saying decreasing taxes is a better way to balance the budget.

    Now it may be that you have some additional context that broadens the intent of Keynes words in those passages and if so it would be good for you to share it. However if you are drawing the inference that you make purely from the Keynes quote that I supplied then I would appreciate if you can deconstruct it carefully to justify your interpretation.

    Of course Keynes may be simply wrong. Or the circumstances of the time may be radically different to todays situation.

    Regards,
    Terje.

  9. January 3rd, 2006 at 21:27 | #9

    Boor-rings.

    Let us discuss supply and demands.

    Every day I demands salmon casserole from my simian. Some days he cans fetch it, others he comes back with pate-filth becauses there is no salmon.

    Why is it, when demand is unlimited, that the incompetent simian droogs cannots supply me with salmon casserole?

  10. Terje
    January 3rd, 2006 at 21:33 | #10

    Why is it, when demand is unlimited, that the incompetent simian droogs cannots supply me with salmon casserole?

    Desire is perhaps unlimited but in economic terms demand is a measure of your ability to supply. And that for most simians (competent or otherwise) has to date proven to be quite finite. Anybody that thinks Ethiopians kids die of starvation due to a lack of desire needs their head read.

  11. January 3rd, 2006 at 21:43 | #11

    Ah economists and the plain english meanings of words.

    Terjeness your view it is then that taxes on salmon are too high?

    I like salmon.

  12. student
    January 3rd, 2006 at 21:54 | #12

    Off-topic slightly, what are people’s recommendations for an introductory economics text for someone who has a BA politics under their belt and is fairly shakey in maths?

  13. Terje
    January 3rd, 2006 at 22:09 | #13

    Terjeness your view it is then that taxes on salmon are too high?

    Not if the Salmon are free to vote in general elections. If they choose to vote then clearly they accept majority rule. And if they abstain then they have nobody to blame but themselves.

  14. Ernestine Gross
    January 3rd, 2006 at 22:11 | #14

    Andrew,

    1. No, your quote (presumably from “Wiki�) does not answer my point b. at all. Of course I am familiar with the hand-waving incentive story as given in your quote: “At the other, where there is a 100% tax rate, the government collects zero revenue because (in a “rational� economic model) taxpayers have no incentive to work or they avoid taxes, and the government collects 100% of nothing.� This story is used in good economic theory courses as an exercise for students to work on to develop analytical skills.

    So, lets do such an exercise.

    Rationality. A minimum condition for rationality is that each person acts in a manner that is logically consistent with his or her preferences. Preferences are defined over ‘commodities’, which include the ‘labour services’ supplied by an individual. A useful assumption is ‘non-satiation’ because it helps to achieve market clearing and it excludes the assumption that people prefer death from starvation over life. (Only the latter assumption is overall supported by empirical observations throughout history)

    i) ‘Government’. Some politicians like being politicians. That is, they like earning an income from providing ‘politician services’. It is perfectly rational for such politicians to not take actions which result in the job ‘politicians services’ not being on offer due to zero tax revenue ie point (1) = 100% tax rate on your Laffer Curve. Conclusion: Either the statement “in a rational economic modelâ€? is false (because the model includes irrational politicians) or the point (1) – ie 100% tax rate – has to be excluded from the diagram because politicians are rational. This is sufficient to destroy your entire argument. But, lets do a thorough job. So far we still have an incentive argument. However, the incentive argument directly contradicts the story in your quote.
    ii) Consider a ‘mixed economy’ (market plus government) with some ‘realistic’ features (ie there is data that is consistent with the ‘stylised facts’), namely: There are some people who don’t own property which would allow self-sufficiency (in a survival sense) and the only marketable commodity they have is their labour service. By the rationality assumption, these people want to survive. Suppose the tax rate is 100% on income of these people – ie the point (1). Contrary to your story, the problem is not one of lack of incentive to work. The problem is that those people will die of starvation. Strictly speaking, our entire body of theoretical knowledge on market economics has nothing to say on what happens to the system when a survival constraint is not met. The common belief is that the drive to survive is stronger than the fear of the law on crime against property.
    c) This leaves tax evaders (avoidance is not interesting because it is ‘race’ between tax collectors and tax avoiders). This is a criminal justice problem.
    d) My statement on what the Laffer Curve is (strictly concave function defined on the closed interval [0, 1] such that the value of the function is zero at the points (0) and (1), would allow another interpretation namely that at the point (1) the institutional environment changes from a mixed economy (markets and government) to some other institutional environment where neither taxation nor markets feature. For example a tribal society where resources are shared according to some custom. But this interpretation is not possible with your story because the point (1) represents 100% tax rate.
    e) (a) to (d) are the reasons for me saying that the point (1) is difficult to interpret – a rather mild statement I would suggest.

    2. Your statement: “On c), like any economic graph, it has to be a combination of “best guess� and econometric analysis�. I cannot but totally disagree with you on the first part of your sentence. There is no purpose in having an ‘economic graph’ which does not make sense and it is definitely not the case that all economic graphs make no sense. It is the case, however, that empirical data is relevant for policy decisions. By economic data I don’t mean the wish lists of ‘advocates’ but data collected and analysed by people who have the appropriate skills and ethics (ie academic values). (I am not saying only academics have academic values).

    3. Your statement: “As you point out, movements close to 1 have no real precedent except in the case of regimes like North Korea and Albania under Enver Hoxha. Movements toward 0 are fairly common as a country collapses into anarchy.� is interesting. It is interesting because I didn’t say what you ascribe to me. May I ask you to re-read what I wrote?

    4. Your statement: “To me, at least, Keynes is advocating analysis similar to the Laffer Curve, Laffer himself attributes it to him – amongst others.â€? Well, Keynes is no longer able to give us his opinion directly and I have not received new information which would lead me to change my mind.

    5. Your statement: “If we started attibuting the true costs of debate to the various schools, perhaps the communists should pay for the devastation wrought by their theories, the socialists for theirs etc. etc. etc. I think the neo-cons would end up being the least poor on this basis.� I don’t know what to make of your statement. I am not talking about a ‘debate’ between communists and socialists on the one hand and neo-cons on the other. I am talking about the work generated by neocons (economic rationalists) for people educated in Economics beyond what was known before 1950, including the theory of competitive private ownership economies with complete and incomplete markets. I thought you would welcome the suggestion that those who spread ‘poor quality’ economic theory (in a technical sense) relative to what is available should pay for the work required to prevent the undoing of progress in the methodology of economic theorising since the 17th and 18th century.

  15. January 3rd, 2006 at 22:18 | #15

    Terjes, there is somethings, how-do-you-says, self-fullfillings in your reasonmuss.

    =”If they choose to vote then clearly they accept majority rule. And if they abstain then they have nobody to blame but themselves. “=

    So the intelligent minority are not only inflicteds with the idiocies of the majority, they is blamesd for their follies as well?

    *one ear forward, one ear back*

    This cat thinks a chink has appeareds in Terjests’ line of argument… perhaps you should puts moggblogging aside and finds me a tin of salmon.

  16. January 3rd, 2006 at 22:19 | #16

    “Student” you musts read my red book!

  17. January 3rd, 2006 at 22:36 | #17

    Ernestine — I once knew a senior executive with an oil firm who used to say to his staff: “I can do a week’s work in 5 days. If I spend 6 or 7 days, I invariably do less than a week’s work. Same with a year’s work, which I can only do in at most 11 months.”

  18. Katz
    January 3rd, 2006 at 23:25 | #18

    http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2006/01/03/wirq03.xml&sSheet=/news/2006/01/03/ixworld.html

    This story is under the headline

    “Bush cuts off cash for rebuilding Iraq”

    If money talks then on the subject of Iraq Bush has decided to become a trappist monk.

    I guess the score is Iran 1, US 0.

    I wonder whether Bush told Howard about this before embarking on Vietnamization Lite.

    How long before Howard decides that “The Job is Done” and courageously withdraws Our Boys?

  19. Ernestine Gross
    January 3rd, 2006 at 23:44 | #19

    Terje,

    Re Keynes:
    I am not fond of ‘deconstructionism’. My interpretation is due to my assumption that the quote comes from one of Keynes’ major works on macro-economics. I fully agree with the point that theoretical knowledge in Economics is conditional not absolute (the relevancy of a result depends on whether the assumptions sufficiently closely approximate the actual conditions at the time).

    Moderator,

    Thanks for the time spent on my lengthy post; every word passed.

    Regards
    Ernestine

  20. Terje Petersen
    January 4th, 2006 at 07:18 | #20

    Ernestine,

    I obtained the Keynes quote here:-

    http://www.heritage.org/Research/Taxes/bg1765.cfm

    Which states that the original sourse was:-

    John Maynard Keynes, The Collected Writings of John Maynard Keynes (London: Macmillan, Cambridge University Press, 1972).

    You said:-

    My interpretation is due to my assumption that the quote comes from one of Keynes’ major works on macro-economics.

    Does that assumption allow you the latitude to interprete all the words of Keynes however you see fit. Can I also have that latitude with all the words of Keynes.

    Let me deconstruct the Keynes quote phase by phase:-

    Nor should the argument seem strange

    He seems to be saying that any reasonable person should be able to follow this line of argument with some familiarity or ease.

    that taxation may be so high as to defeat its object,

    ie high taxes may not achieve the aim of raising more revenue. I assume that revenue is the infered object because he goes on to talk about balancing budgets.

    and that, given sufficient time to gather the fruits,

    ie as and when the economic impact of lower taxes has flowed through the economic system and made its effects apparent through growth in the size of the tax base

    a reduction of taxation will run a better chance than an increase of balancing the budget.

    ie An increase in the tax rate would not have had as high a probability of success in increasing revenue.

    For to take the opposite view today

    So it applies when and where Keynes made the statement but may not be quite as relevant at other times.

    is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more–and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.

    ie to raise tax rates when it made more sence to lower them is just pig headed and naive.

    Now either:-

    a) Keynes was wrong when he wrote the passage.
    b) Keynes was right but the time and place was unique.
    c) I have interpreted him unfairly.
    d) Tax cuts have a good chance of increase tax revenues.

    I suppose it is also possible that the quote is wrongly attributed.

    You seem to have chosen option ‘c’ on the basis that you can interprete the words of Keynes however you want so long as his words come from one of his major works on macro-economics. Which is a very odd position to take.

    Regards,
    Terje.

  21. January 4th, 2006 at 07:23 | #21

    I note on this morning’s new that the US “free trade” agreement is failing this nation.

    TOgether with the chimp’s refusal to clean up his mess in Iraq, that makes it 2-0 to the left on major recent issues.

    Oh, and 2-0 to the much maligned Mark Latham…

  22. Terje Petersen
    January 4th, 2006 at 07:52 | #22
  23. Terje Petersen
  24. January 4th, 2006 at 08:41 | #24

    ‘Scuse the clayton’s trackback:

    FTA Shafts Australia: proof is in.

    Not that we’ll react with any business sense to this news.

  25. Vee
    January 4th, 2006 at 09:23 | #25

    My only question so far is what does the f stand for in Terje’s formula?

    Also don’t know whether its a WP2.0 problem or my aggregator is slow in updating but I’m yet to receive anything on the aggregator after Peace in Aceh

  26. January 4th, 2006 at 09:42 | #26

    Armaniac – can you point to where evergreening has been a problem (and if anywhere only in the US)? It will be a long wait!

  27. StephenL
    January 4th, 2006 at 09:57 | #27

    Umm Terje,

    According to the graph you provide US government revenue was about 6% higher in 2005 than in 2000. I can’t see if this is in constant dollars or not.

    If this is in constant dollars then revenue has grown at about the same rate as population. If inflation has not been allowed for there has been a fall of more than 10% in real terms in revenue.

    Sure the figures for the last two years look good, but that is inevitable as the economy comes out of a serious slump – a slump that began pre-Bush but was made much worse through is actions.

    It is also noticeable that the graph has marked on it *only* the second round of tax cuts Bush gave. If the Laffer curve is right one would expect the first round to have more of an impact yet for two years after these were applied revenue continued to fall.

    Of course it is possible that revenue will rise so much in the next few years that your case will be justified, but struggling back to a point where revenue per head is what it was in the last days of Clinton is hardly proof.

  28. Paddy
    January 4th, 2006 at 10:07 | #28

    STUDENT asked “what are people’s recommendations for an introductory economics text for someone who has a BA politics under their belt and is fairly shakey in maths?”

    WELL, if I were going to Dublin, I wouldn’t be startin from there!

  29. January 4th, 2006 at 10:12 | #29

    Student – for a good intro try this: Economics in one lesson: [the shortest and surest way to understand basic economics] view the v.good reviews on Amazon.

  30. Dogz
    January 4th, 2006 at 11:02 | #30

    Janet Albrechtsen with a great story on union excess: http://www.theaustralian.news.com.au/common/story_page/0,5744,17722593%255E32522,00.html

    No better case for the latest IR reforms.

  31. Andrew Reynolds
    January 4th, 2006 at 11:23 | #31

    Student:
    Start with the foundation of all modern economics – “The Wealth of Nations” (short title) by Adam Smith and then update it with “The Road to Serfdom” by Friedrich von Hayek. Pick up some trade theory through David Ricardo and then bring it back to politics with “On Liberty” by John Stuart Mill.

  32. Ernestine Gross
    January 4th, 2006 at 11:46 | #32

    Terje,

    The reference you provide is from the Heritage Foundation Policy Research & Analysis site. For years I managed to live quite well ignoring literature as quoted. Eventually, I came across an article in which a Professor (background in psychology) announced that Universities are the last bastion of socialism – in Australia! The discrepancy between reality as I experienced it and the content and title of the article was quite educational.

    Policy Problem 1: Unemployment is say 50%, businesses have gone bankrupt, the government cannot balance its budget due to expenditure exceeding taxation revenue.

    Policy Problem 2: Unemployment is 5%, business profits are at historical highs, major bankruptcies are attributable to mismanagement (or worse) and the government has a surplus due to GST.

    Question: Does your Heritage Foundation Policy Research & Analysis excerpt from Keynes writings (I assume they copied the paragraphs correctly) provide an answer to Problem 1 or Problem 2 or is irrelevant for both? And, where exactly does the Laffer Curve come in? Moreover, what exactly is the problem to which the Heritage Foundation Policy Research & Analysis article provides the solution?

    I have no intension of going through the reference you gave, namely “John Maynard Keynes, The Collected Writings of John Maynard Keynes (London: Macmillan, Cambridge University Press, 1972� – if it exists (who is the editor?) to find the quote for the purpose of checking on my interpretation.

    You are of course free to select any arbitrary passage from anybody’s writing and draw whatever conclusion you want. However, I am not going to be part of such exercises. Time is a limited resource. I am about to bake an apple cake – an income tax free economic activity. Yes, it also doesn’t increase GDP.

    Regards
    Ernestine

  33. Mike Pepperday
    January 4th, 2006 at 12:06 | #33

    Student:

    Get Australian Public Policy, 2nd ed 2004 by Alan Fenna

    Title is a bit of a misnomer – much of it is economics for politics students. Very readable.

  34. Ian Gould
    January 4th, 2006 at 12:29 | #34

    e. Keynes was making the obvious observation that if taxes were sufficiently high disincetives to work and incentives to evade taxwere also high.

    He was writing at a time when the top marginal tax rates in most developed cuts were in the 80 or 90% range.

    Top marginal tax rates have subsequently been cut drastically (mainly courtesy of increased indirect taxes which have shifted the tax burdne from the rich to the poor and middle class).

    I seriously doubt thatr Keynes would think that a top marginal tax rate of under 50% would result in significant revenue losses.

  35. Ian Gould
    January 4th, 2006 at 12:33 | #35

    StephenL: “proof” of te Laffer Curve usually relies on a mix of constant dollars and ignoring the effects of bracket creep (which increases effective taxes).

  36. Terje Petersen
    January 4th, 2006 at 14:30 | #36

    It is also noticeable that the graph has marked on it *only* the second round of tax cuts Bush gave. If the Laffer curve is right one would expect the first round to have more of an impact yet for two years after these were applied revenue continued to fall.

    The first round was not a supply side tax cut. It was mostly rebates that were designed to put cash in peoples pockets (ie Keynesian demand primining) rather than to change the incentives. The first round of Bush tax cuts were roundly criticised at the time by supply siders. I don’t claim that the current trends proove that the USA was on the RHS of the Laffer curve. I merely throw them into the mix for discussion. The certainly don’t demonstrate any decline in tax revenues since the 2003 tax cuts.

    My only question so far is what does the f stand for in Terje’s formula?

    GDP=f(tax rate)

    All it means is that GDP is a function of the tax rate. At 100% tax the GDP approaches zero (except in the black market). We don’t know the exact shape however if the Laffer curve is the shape or Uluru then we can infer the shape of the function ‘f’ and know that it entails a steep roll off in GDP as the tax rate increases. So even while public goods may stay pretty flat with higher taxes (the flat top of Uluru) then the amount of private goods will be dropping significantly.

    I seriously doubt thatr Keynes would think that a top marginal tax rate of under 50% would result in significant revenue losses.

    So Ian is backing option (b) and suggesting that Keynes would have supported the tax reforms of Reagan, Thatcher and Hawke but not Bush or Howard.

  37. Dogz
    January 4th, 2006 at 15:24 | #37

    I seriously doubt thatr Keynes would think that a top marginal tax rate of under 50% would result in significant revenue losses.

    I seriously doubt that you are correct. In Keynes’ time a far smaller percentage of taxpayers paid the top rate. Eg, in 1941 (and in 1941 dollars), the top US rate of 94% cut in at $1M.

    It is only public servants who care little about top marginal rates because their salary is almost completely divorced from their actual effort anyway. For the rest of us who are productive enough to be in the top bracket, government confiscation of 50c of every hard-earned dollar has a huge impact on economic behaviour.

  38. Ian Gould
    January 4th, 2006 at 15:36 | #38

    >It is only public servants who care little about top marginal rates because their salary is almost completely divorced from their actual effort anyway.

    Sorry but I’m a self-employed small business owner. I think your histrionics are laughable.

    Your statement is false QED.

    PS – get a job in the public service in the policy or professional streams and you’ll rapidly see how out of touch with reality your view of the public service is.

  39. Andrew Reynolds
    January 4th, 2006 at 15:49 | #39

    Ian,
    I would tend to agree that Dogz’s statement needs justification, but to state that it “…is false QED” (meaning “as has been demonstrated”) I also find unjustified – you have not demonstrated its falseness.

  40. Dogz
    January 4th, 2006 at 16:02 | #40

    PS – get a job in the public service in the policy or professional streams and you’ll rapidly see how out of touch with reality your view of the public service is.

    I had a job in academia, a branch of the public service. The place was full of lifers. The university administration was a dinosaur. Salary was almost entirely unrelated to productivity (before you ask, I did qute well but left in part due to the mind-numbing bureacracy).

    Your statement is false QED.

  41. Dogz
    January 4th, 2006 at 16:12 | #41

    Andrew, Ian’s QED was justified since I stated that _only_ public servants care little about top marginal rates, and if we interpret Ian’s statement that he finds my “histrionics laughable” to mean he too is disinterested in the top marginal rate, then combined with the fact that he is not a public servant, my statement is necessarily false.

    I will revise it: only public servants and Ian Gould care little about top marginal rates.

  42. Terje Petersen
    January 4th, 2006 at 18:59 | #42

    I thought Dogz statement about public servants was of secondary significance. More important was his point about income tax in the days of Keynes.

    A salary of US$1M per annum in 1941 is like US$10M today.

  43. January 5th, 2006 at 00:40 | #43

    Over at Armaniac’s blog (see his link to FTA material in message 24 above), someone has already replied to weekly’s criticism at message 26 above with a reference to the Canadian experience.

  44. January 5th, 2006 at 07:12 | #44

    Student – for a good intro try this: Economics in one lesson: [the shortest and surest way to understand basic economics] view the v.good reviews on Amazon.

  45. Ernestine Gross
    January 5th, 2006 at 10:09 | #45

    Student – for a good introduction to Economics I would suggest:

    Robert Heilbroner, The Worldly Philosophers, 6th edition
    Adam Smith, The Wealth of Nations (first, 1776)
    Frank Hahn, any one of the titles listed in http://mitpress.mit.edu/catalog/author/default.asp?aid=1370

    otherwise: Paddy’s comment.

  46. January 5th, 2006 at 11:14 | #46

    Well, the statement about Public Servants is in many respects true, but in the opposite manner to the way Dogz describes.

    I’ve worked as a contractor in a range of legal environs, currently in legislation policy. IN commercial law my hours were generally pretty normal (9-5 most days), pay was very good, work stress medium with some fluctuations. Then I went to a very interesting public job, taking a vast pay cut, with a big increase in stress, still normal hours. Policy, at least where I’m looking at it, involves pretty much every second day starting at 8-8.30 to fit in an early meeting, and rarely walking out before 5.30-6, and still pays well under, vastly under, what I got as a more junior commercial advisor.

    It probably is extremely difficult to remove inefficient people on ongoing tenure, however a large number of us are on contracts, and I’ve seen several people bumped, more than one quite unfairly.

    The assumption is that professionals who go public do so for the easier liefstyle, but my view is that is equally achievable, at least for the likes of lawyers and accountants, by going in house corporate, and in fact many of us such as myself did it because *gasp* we wanted more meaninful and interesting work.

    I’m not whinging about the relative lack of pay, nor the long hours- I stay back until the work that needs to be done is done, that’s fine. But I think it should be clear that for much of the PS the lack of pay-productivity link may work both ways.

    And yes, I’m on lunch right now!

  47. Ian Gould
    January 5th, 2006 at 12:40 | #47

    >I’ve worked as a contractor in a range of legal environs, currently in legislation policy. IN commercial law my hours were generally pretty normal (9-5 most days), pay was very good, work stress medium with some fluctuations. Then I went to a very interesting public job, taking a vast pay cut, with a big increase in stress, still normal hours. Policy, at least where I’m looking at it, involves pretty much every second day starting at 8-8.30 to fit in an early meeting, and rarely walking out before 5.30-6, and still pays well under, vastly under, what I got as a more junior commercial advisor.

    This is why I quit my public service policy job to work in the private sector.

  48. Dogz
    January 5th, 2006 at 12:52 | #48

    This is why I quit my public service policy job to work in the private sector.

    So why then did you accuse me of being out of touch? It seems your experience directly supports my original assertion:

    It is only public servants who care little about top marginal rates because their salary is almost completely divorced from their actual effort anyway.

    Salary divorced from effort means you get paid the same regardless of the effort you put in. It doesn’t mean everyone puts in no effort, it just means that you do not receive financial rewards for putting in more effort or being more productive. Combined with tenure, that automatically leads to a lot of dead wood.

  49. January 5th, 2006 at 17:07 | #49

    I don’t think, just to clarify, that it’s divorced from effort, just that the nexus is probably on average weaker. This is in part due to the inability to pay appropriate cash to hard working professionals at the higher level.

    For example, and this may be of interest to those on the right who are supporters of the anti terror crimes, the prosecution lawyers who will be arguing those cases and playing a pivotal role in ensuring terrorists and their supporters are gaoled will be paid at around 2/3 the market rate for a criminal defence lawyer, and 1/2 the rate (or lower) for a litigator who runs contract disputes.

  50. Ian Gould
    January 5th, 2006 at 19:22 | #50

    Dogz, your assertion is wrong because I was not atypical. The majrotiy of the peopel I worked with in the public sector could have made substantially more in the private sector – and often for coniderably less ffort.

    I know that the concepts of “public duty”, “contributing to society” and “altruism” are alien to you but some of us do actually believe in them.

  51. Andrew Reynolds
    January 5th, 2006 at 19:33 | #51

    Ian,
    To many of us on the right those concepts are dear to our hearts – IMHO, it is many of those on the left that seem to believe that these need to be mandated by law and all money pay needs to be equal for equal effort. I tend to believe that people are motivated by many different things and attempts to reduce them to money, or money equivalents, misses the point.
    These duties, contributions and altruisms are the foundation of a free society.

  52. Dogz
    January 5th, 2006 at 21:10 | #52

    The majrotiy of the peopel I worked with in the public sector could have made substantially more in the private sector.

    When I worked in a university I used to hear that _all_ the time from other academics. Now that I’m actually in the private sector, I realise it was a load of old cods. Most of them wouldn’t survive ten minutes in the private sector. I don’t know if other areas of the public service are the same. I believe academics tend to overvalue their worth to society as a whole because they rarely step outside their hermetically sealed, self-referential value system, which reinforces their status within their own narrow field but is almost completely isolated from the rest of the world.

    I know that the concepts of “public duty�, “contributing to society� and “altruism� are alien to you but some of us do actually believe in them.

    Is that why you quit and went into the private sector Ian? Public duty? Upthread you said it was the low pay and long hours in the public sector that drove you out.

    BTW, you know nothing of what I do for a living or in my spare time.

  53. January 5th, 2006 at 22:26 | #53

    Ernestine, “Nataly” appears to be a sophisticated spammer using text taken from nearby to fake authenticity and smuggle in the “Nataly” link as payload.

  54. Ernestine Gross
    January 6th, 2006 at 00:10 | #54

    Thanks, P.M. Lawrence.

  55. Seeker
    January 6th, 2006 at 02:17 | #55

    Dogz says:
    “I believe academics tend to overvalue their worth to society as a whole because they rarely step outside their hermetically sealed, self-referential value system, which reinforces their status within their own narrow field but is almost completely isolated from the rest of the world.”

    I love the smell of stale cold clichés in the morning. Or is it parody?

    Maybe the academic discipline/department/institution you were involved with wasn’t doing its job properly at the time you were there, (though you were of course), but your generalisation is ridiculous. An equally valid (or invalid) generalisation could be made by simply substituting the word ‘academics’ with ‘humans’ in your statement.

    So, Dogz, what is your ‘real world’ solution for the (alleged) failures of academics that would fulfil all the following essential criteria:

    a) get rid of all the parasitic navel-gazing, academic deadwood, while managing to

    b) retain only the real intellectual McCoys, and

    c) guarantee them genuine academic independence from both the lowest-common denominator mob-rule, and the academically destructive penury of endless funding cuts, and

    d) ensure they remain fully and productively engaged with, AND properly rewarded by, “the rest of the world”?

    PS I am not an academic, nor related to any, etc.

  56. Dogz
    January 6th, 2006 at 09:48 | #56

    An equally valid (or invalid) generalisation could be made by simply substituting the word ‘academics’ with ‘humans’ in your statement.

    Not so. Academia is a very different career from most. For starters, you have an enormous amount of freedom coupled with enormous job security. Believe me, it is not easy to leave those kind of working conditions :)

    Seeker, without going into enormous detail, Australia could start by imitating the US approach to higher education. They have a very large percentage of the top Universities in the world, both public and private. But it will almost certainly require a purge of existing deadwood on both the academic side and in the administration.

  57. January 7th, 2006 at 21:31 | #57

    The worlds of academia, politics and the media do form a group in such a way that members of the last two groups can easily get the idea that they are in touch with the wider world when they haven’t actually managed to make contact with, and get feedback from, anyone outside those groups. But I never heard that academia especially suffered from this. That is, its proper focus doea lie outside itself, but doesn’t involve reaching the wider body politic except in a few special cases. How would the classics, history, Romance languages, the “hard” sciences or whatever need that?

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