Home > Economics - General > Rawls, Bentham and the Laffer curve (cross-post at Crooked Timber)

Rawls, Bentham and the Laffer curve (cross-post at Crooked Timber)

September 9th, 2014

The 1970s saw two important and influential publications in the long debate over justice, equality and public policy. In 1971, there was Rawls Theory of Justice, commonly described in terms like “magisterial”. Then in 1974, at lunch with Jude Wanniski, Dick Cheney and Donald Rumsfeld, Arthur Laffer drew his now-eponymous curve on a napkin. Of course there was nothing new about the curve: it’s pretty obvious that an income tax levied at rates of either zero or 100 per cent isn’t going to raise any money, and interpolation does the rest. What was new was the Laffer hypothesis, that the US at the time was on the descending side of the curve, where a reduction in tax rates would raise tax revenue.

I’ve always understood Rawls in terms of the Laffer curve, as arguing in essence that we should be at the very top of the curve, maximizing the resources available for transfer to the poor, but not (as, say, Jerry Cohen might have advocated) going further than this to promote equality.

A couple of interesting Facebook discussions have led me to think that I might be wrong in my understanding of Rawls and that the position I’ve imputed to him is actually far closer to that of classical utilitarianism in the tradition of Bentham (which is, broadly speaking, my own view).

Facebook has its merits, but promoting open public discussion isn’t one of them, so I thought I’d throw this out to the slightly larger world of blog readers.

It started out with a post by Ingrid, mentioning a paper she’d presented on limitarianism (a new term to me, though not a new idea), the proposition that as a matter of public policy or of individual ethics, there ought to be a maximum limit on individual incomes. I’m hoping Ingrid might write something more about this here, but she shouldn’t be blamed for any errors I make.

On my interpretation of Rawls, it seems as his difference principle implies a kind of limitarianism. If high income earners are taxed to yield the maximum possible revenue, then their incomes will be bounded above. This won’t be an absolute bound, but will depend on their earning capacity which in turn will reflect both the general level of technology and the extent of “pre-distribution”, that is whether the economic organization of society yields highly unequal market incomes.

That got me thinking about utilitarianism. One way of looking at Rawls (not one he accepted, but still defensible) is as putting forward an extremely egalitarian rank-dependent version of utilitarianism, with all the weight on the bottom of the distribution. But it turns out that you don’t need this to advocate a tax system very close to the Laffer maximum. On the default utilitarian assumption of log utility, additional income to someone on $1 million a year yields 1 per cent of the utility of additional income to someone on $10 000. So, a costly tax-transfer system taking from money the $1 million group and giving it the $10 000 is beneficial as long as the proportion lost through incentive effects, collection costs and so on is less than 99 per cent. Diamond and Saez did the sums properly a while back and concluded that

the social marginal utility at the $1,364,000 average income of
the top 1 percent in 2007 (Piketty and Saez, 2003) is only 3.9 percent of the social
marginal utility of the median family,

The implied policy is a progressive tax system with a top marginal rate of 73 per cent.

It seemed obvious that a Rawlsian policy should be very similar. But after looking around a bit, it turned out that Rawls was, at best, ambivalent about the whole idea of progressive income taxation, let alone the kind of revenue-maximizing extraction implied by a utilitarian analysis. Another interesting discussion followed on Facebook with contributions from Jacob Levy, Jon Mandle, Mike Otsuka and others. I’ve long since lost track of FB privacy policy, but you may be able to read it here.

I got two things out of the discussion. The first is that Rawls had some mistaken ideas about economics, logically unrelated to his difference principle, which contributed to his scepticism about progressive taxes. The intellectual atmosphere of the 1970s, which gave rise to the Laffer curve and the “tax revolt” may have had something to do with this.

The second is his focus on “ideal theory” which I don’t fully understand, but which seems to me to be unhelpful, partly for the reasons put forward by Jacob Levy. The general claim made by Rawls is that, whatever the case for progressive income taxes in society as it is, a properly organized society with limits on inheritance, open access to education and no unfair market power wouldn’t need them.

I don’t buy this. In any society sufficiently close to reality to need a taxation system at all, there are going to be inequalities of pre-tax income large enough that an egalitarian would want to redistribute that income. Given that nearly all taxes are regressive, a progressive income tax is an essential part of such a policy.

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  1. J-D
    September 9th, 2014 at 07:48 | #1

    My first reaction to the suggestion that ‘a properly organized society with limits on inheritance, open access to education and no unfair market power wouldn’t need’ progressive income taxes was ‘what colour is the sky there?’

    But on further reflection I realised my first reaction was wrong. The sky is blue there. It’s just that it’s ten thousand years ago.

    I’m probably not saying anything new about the Laffer curve, but the point of it isn’t to determine how income tax rates should be set. It’s to make rich people feel better about themselves. (The same seems to be true of a lot of right-wing economics, which in this respect takes up a big chunk of the space that in past ages was occupied by right-wing religion.)

  2. Ikonoclast
    September 9th, 2014 at 09:03 | #2

    I agree with the John Quiggin’s analysis above. I particularly agree with “The implied policy is a progressive tax system with a top marginal rate of 73 per cent.” I would want to see a bit more but as 73% is justified by economic theory in terms of utility and equity it seems eminently fair to all parties.

    I also agree with limitarianism for asset net worth. Above a certain obscene amount there is no need for an individual to have more wealth. On today’s values, I would think somewhere in the range of a $50 million to $100 million limit on individual wealth should apply. Mind you, if we tried to apply that even in the Australian jurisdiction, the USA would attack us and reduce us to rubble.

    This brings up an important realpolitik point. No country, with certain exceptions, could go very far down any kind of even real socialist path without the USA violently attacking it and destroying its economy and many of its people.

    The exceptions are Russia, China, a few of their protected satellites and the odd insignificant country which the US would destroy with sanctions rather than bothering with force.

    This indicates that a revolutionary change (via the ballot box or some other method) has to occur in the US first before genuinely social democratic progress could be made in the world. I don’t see that happening in my lifetime. Although an attempt and a huge ultra-right reaction (martial law and mass killing of dissidents) may well occur in the US in my lifetime ie. in the next 20 to 30 years.

  3. Peter Rickwood
    September 9th, 2014 at 09:36 | #3

    JQ: Given that nearly all taxes are regressive, a progressive income tax is an essential part of such a policy.

    I have more a question than a comment about this, because I’ve always wondered whether we could get away without taxing labour. In your opinion JQ, could you see any way of getting rid of income/labour taxes while still redistributing income? You say no above, but if we had very high estate taxes, Tobin taxes, Pigovian taxes, consumption taxes on non-staples, land tax, and so on, could that not be made to work?

  4. Jereboam
    September 9th, 2014 at 10:17 | #4

    I’m delighted by such interest in promoting my welfare. As a tax lawyer with nimble connections around our little globe (and projects called Moon and Mars for possible future developments financed by the Li Ka Sheng Foundation) I see much profit for me in any attempt to return to pre-Thatcher/Keating/Reagan/Kerr rates. And thanks for the laff Ikonoclast. It won’t be those wimps in America who hold the line for those who have the pork and don’t see why some pathetic fashionable idea about majoritarian “democracy” should justify the numbers of the have-lesses looting the stores of the pork owners. I’ll give you a hint. Though Singapore based our Point O One Percenters Tax Foundation has Chinese and Russian principal patrons. Mind you we are having trouble persuading those underbreeding Europeans that Muslims with ten children not only provide thousands of underemployed young men to go on the modern equivalent of Crusades but potential majorities in once Western countries for policies of redistribution to the unproductive masses. They don’t need to be a real majority on their own when added to a good part of Mitt Romney’s 47 per cent. Makes one glad there are so many Hindus…..

  5. ZM
    September 9th, 2014 at 10:57 | #5

    Jeroboam,

    You don’t by any chance have a relative by the name of Yuri or Midrash? Your phrasing recalls them to mind…

  6. Ikonoclast
    September 9th, 2014 at 11:05 | #6

    @Jereboam

    I don’t agree with all of your assessment. You are correct that Russia, China and some others are forming an alliance (Shanghai Cooperation Organisation) to counter US/NATO. You are also correct in the implication that US/NATO are complacent and are misreading geostrategic developments. They ought to be particularly worried about the de-industrialisation of US/NATO countries compared to China.

    High population is not always power. Countries can also collapse under their own weight with too great a population. Limits to growth have been reached and negative mis-matches between regional populations and regional resources are now in the offing. The Middle East, Africa, Europe (sans Russia), India, Pakistan. S.E. Asia and China all have overshot sustainable growth and even sustainability at current population levels.

    Russia has ample resources still and possibly not enough people: an unusual combination these days. North America’s overshoot is not too bad mainly because of the resource bonanza still left in Canada. Brazil and Australia have not overshot yet.

    I expect the overshot regions to run into big trouble very soon. China play a clever game of keeping internal lines and avoiding strategic overreach both militarily and in terms of grand strategy. However, I think even they have under-estimated limits to growth and climate change issue. Both of these issues will impact very hard on China.

    Wealth in the form of money and other paper assets can prove ephemeral. Debts can be repudiated and resources can be taken by force if necessary (except from the territory of a rival major nuclear power). The world financial system and global trade system will both probably implode soon. Real assets, real force and regional resource autarky will decide issues. This is the unfortunate Realpolitik of it.

  7. derrida derider
    September 9th, 2014 at 12:11 | #7

    Peter, if you believe (with Marx) that capital is merely “crystallised labour” – it is something created by past labour – then the only taxes that are are NOT on labour are those on untransformed natural resources (ie the value of unimproved land, raw mineral resources, etc). That in fact was why the Treasury economists were so keen on the Mineral Resources Rent Tax – the originally was quite carefully designed to avoid taxing labour or capital. It is also the reason why your council rates are levied on the UCV – Unimproved Capital Value – of your land rather than the full value of house and land. It’s all part of the wider point that who hands over the tax money to the government is not necessarilly the person who actually loses money by it, as varying groups have varying ability to indirectly pass the loss on. Google “tax incidence”.

    The Saez estimate of 73% for the optimal top tax rate is in fact empiric, not theory, based; it uses behavioural studies of taxation to impute both the likely utility and Laffer curves. It is also, importantly, explicitly only optimal for the top 1% or less (the optimal marginal rate for mere upper middle income earners is much less because they’ll miss the money more). That means, as I’ve argued before, it won’t actually raise enough cash to really help the poor a lot, at least outside the US with its amazingly skewed income distribution.

    One point of the OP is actually how much this last matters. Do you want to just raise heaps of money to redistribute and hence make sure no-one is too poor or do you want to make sure that no-one is too rich? Your answer will shape what tax system you want to see.

  8. Fran Barlow
    September 9th, 2014 at 12:21 | #8

    @derrida derider

    Do you want to just raise heaps of money to redistribute and hence make sure no-one is too poor or do you want to make sure that no-one is too rich? Your answer will shape what tax system you want to see.

    Clearly, I’d like both outcomes. I suppose the question is what would happen when I got to the point where I had to trade some of one for more of the latter.

    I’d like to get to that point so I could have this dilemma. On balance, I lean towards fewer rich people. As the saying goes, wealth has a quality all its own, and is disempowering for all who don’t have it. In a truly inclusive society, nobody should be relatively wealthy, or at worst, the differences should be perceived as trivial by proetty much everyone.

  9. September 9th, 2014 at 12:26 | #9

    The common argument against taxing the well off is that they will stop working if too much of their income goes in tax. And clearly that must be true at some point. However, my observation of my hard working friends is that they just like work, and would do so for much less. A programmer friend of mine has essentially had his income steadily reduced over the past 5 years, and is an example of someone who will do the same work for less.

  10. Peter Rickwood
    September 9th, 2014 at 13:28 | #10

    derridad: Peter, if you believe capital is merely “crystallised labour” – it is something created by past labour – then the only taxes that are are NOT on labour are those on untransformed natural resources

    OK, fair enough, that makes sense. But the form of the taxation makes a big difference to incentives and behaviour, surely? An estate tax is a tax on previous labour, sure, but levied on the recipient. I can’t see that discouraging the utilisation of labour to the same extent as a simple income tax. So introduction of estate taxes and a corresponding drop in income tax should encourage more employment, no? I’m interested if JQ has a view on how far you could take this.

  11. Fran Barlow
    September 9th, 2014 at 13:36 | #11

    @John Brookes

    Indeed that’s so. While some people are highly motivated by earning large amounts of money, even in these cases it typically strikes me that this is an exercise in self-aggrandizement. They want the money for its demonstrative value — proof they have succeeded at something, for the celebrity and acclaim, much as the sporting champion holds aloft a trophy.

    Some realise the power it offers them over others and so are really motivated by the desire to bend others to their will. Here, the quest is a kind of megalomaniacal narcissism but again I doubt society would be the poorer if it simply rewarded such folk a lot less.

    What the vast majority of people I’ve met with hope for, beyond mere existence, is the respect of their peers, control over their lives and a sense that their activity serves some worthy end. You don’t need shedloads of wealth for that. You just need societies composed of people and structures that include and support each other and nurture the human possibility lurking within us all.

  12. kevin1
    September 9th, 2014 at 15:47 | #12

    @Peter Rickwood

    I understand the intent of Pigouvian taxes as funding externalities, and the Tobin tax as a small factor in national govt budget support (at least as proposed by John Langmore in his contribution to The Tobin Tax ed. Mahbub ul Haq et al. 1996.) So both in a closed loop. Consumption taxes regressively attack workers and the poor at the expenditure rather than income stage, so no improvement there. Because estate taxes are after death doesn’t mean they won’t affect work preferences beforehand, though it would be interesting to know how sensitive to policy changes are many late career workers in “spending the inheritance” due to rosy predictions of their children’s future, or continuing working and saving due to pessimism about their own.

  13. Jereboam
    September 9th, 2014 at 15:52 | #13

    @ZM
    No but I am Methuselah’s big brother.

  14. kevin1
    September 9th, 2014 at 16:17 | #14

    @John Brookes

    In Stiglitz’s 2000 Economics of the Public Sector, he said there was a consensus afterwards that the Laffer-inspired tax reductions in 1981 led to lower tax revenues, and the further lowering in 1986 had a negligible effect on savings and labour supply. Much of this was a rollback of inflation bracket creep during the seventies. He says taxes on the very rich increased a lot in 1993, but their incomes and tax paid still increased, and by 1996 Laffer solutions were not supported by economists or the people. Revenues from the very rich increased, but probably due to the perception that these tax reductions could not last, so capital gains were crystallised. Krugman’s 2013 debate with Laffer is here. http://www.c-span.org/video/?c4458044/paul-krugman

  15. Newtownian
    September 9th, 2014 at 19:15 | #15

    Regarding the Laffer(ble) curve, or as it should be known??, the Pareto function, ….(I love un/poor attribution/plagiarism/wheel reinvention…..best form of flattery).
    When I first saw this I thought it was mildly interesting, Pareto being one of those probability density functions which can be used to model reality in either a balanced way that acknowledges uncertainty, or irresponsibly to legitimise ad hoc preconceptions by wrapping fuzzy ideas in otherwise perfectly respectable maths.
    Then I realized economics is in fact the kingdom of the latter type of modelling ad hocery what with adaptation of 19th century chemical equilibrium theory, 2D pre-year 10 high school Cartesian geometry (e.g. supply/demand curves), estimates of prices to a precision of 8 significant figure??!!, assertions by conservative politicians that the laws of (of course neoclassical) economics are as universal as Newtonian mechanics, ersatz Nobels so as to claim ‘scientific’ authority. And all the while lacking its Copernican theory to justify such practices.
    The Pareto Curve appears to be a great illustration of this underlying intellectual irresponsibility which in turn underlies JQ’s concerns. Like so many economic ideas it appears to have been a useful staring point which unfortunately got locked in a self-serving straightjacket i.e. 2 dimensional conceptualization (tax v. income) of a process (delivery of social benefits) whereby if you know the position of two determinants you can supposedly identify and estimate a happy maximum/mode and ignore all complexities by dismissing them as externalities. Problem solved ! (yeah right).
    Even Newton for his great achievements in describing the mechanics of the earth moving around the sun under gravity using analogous techniques wasn’t so deluded/narrow minded to say he had the final answer. Apocryphally he said this was only the start and more certainly immediately moved onto the problems of 3 or more bodies moving and interacting http://en.wikipedia.org/wiki/N-body_problem . What arose was recognition that rather than finding some perfect celestial balance you could find or evolve instead was a mixture of special cases of semi-stable interaction when you had 3 or more bodies in play together with for the most part chaos.
    Has economics followed this further analogy lesson? As far as I can tell only a few like Steve Keen and maybe Keynes have been willing to escape this self-serving 2D straightjacket and even they are locked into vague concepts which seem more derived from our simian social patterns like ‘money’, ‘value’, ‘taxes’ which look solid until you look closely at which point they become Laffer(ble).

  16. plaasmatron
    September 9th, 2014 at 19:33 | #16

    Interesting take on this theme in the context of Superannuation/Aged Pension over at New Matilda.

    https://newmatilda.com/2014/09/09/super-idea-better-retirement-plan

    Info like this suggests that the system is being rigged. The average guy feels under pressure from the “budget emergency”, while the expanding world money base is “pay-walled” to remain with the 0.1%.

  17. September 9th, 2014 at 22:55 | #17

    @Fran Barlow

    Yep, you say it very well Fran!

  18. Megan
    September 9th, 2014 at 23:01 | #18

    @ZM

    Can’t even spell his own name. Definitely the same person.

    The name Jeroboam ????????? is commonly held to have been derived from riyb ???? and ?am ???, signifying “the people contend” or “he pleads the people’s cause”. It is alternatively translated to mean “his people are many” or “he increases the people” (from ??? rbb, meaning “to increase”), or even “he that opposes the people”. In the Septuagint he is called Hieroboam (????????).

    per Wikipedia

  19. Jereboam
    September 10th, 2014 at 02:06 | #19

    @Megan
    Well spotted. I refer to your spelling pedantry. it all began with our father Nebuchadnezzar’s secretary taking dictation and giving my brother Reho and me Jero an e for an o. now its a family quirk.
    Actually my brother Reheboam [now sic] has posed some intrresting questions. E.g. if taxes are called progressive when the rate is progressively higher on the higher nominal incomes how come the tax is called regressive instead of proportional when it is applied at the same rate regardless of a peron’s income. True the poor end a higher proportion of their income (which in truth may itself be de facto a negative income tax receiot) on consumption which is (if not in Australia where fresh food is exempted) subject to GST/VAT at a flat rate but that doesn’t excuse a totally tendentious and illogical use of “regressive”.

    Another question inverts the logic of the increasing marginal rate of ptogressive taxes by pointing out that an executive who is paid $1 million a year needs to to receive a much bigger after tax addition to income in order to provide the same finacial incentive to keep working as someone on $50000 a year receives from amodest increase (or no increase at all but job security). Doesn’t that undermine the argument that progressive taxation enhances utility?

  20. Jim Birch
    September 10th, 2014 at 09:31 | #20

    @Jereboam
    I don’t think so. Supposing salaries were capped at some figure, would people stop moving up the corporate ladder? I doubt it. Suppose a exec could earn the same amount sitting in a cubicle every day typing data from forms into a computer as they could running a corporation. How many would swap? I think none. Humans work for a complex set of of reasons. Money is a big one, especially among the poor. As you move up the tree, people want other things. Kudos, for example, is vastly underrated in economic thinking, imho. Get that right and people will literally work for nothing provided they are actually starving. Taking a historical perspective, we find that pay differentials have varied a lot but the levels are not well correlated with economic goodies like growth. Something else is going on.

  21. Jereboam
    September 10th, 2014 at 14:05 | #21

    @Jim Birch

    I think you have shown what Reho implied, namely that the justification for progressive taxes can’t be confidently and smugly based on some nice neat and simplistic maths which presumes that it is enough to say that a dollar taken from a rich man will be missed less than if taken from a poor one. All sorts of personal, cultural, religious, traditional, psychological etc factors affect the relationship between tax exacted and welfare/happiness in a given case. The old Scandinavia before it took on the challenge of admitting non- family and trying to be piously multicultural wouldn’t have had the big problem of the high income earners paying over 70 per cent at the margin so the dimmer and less functional members of the family could be supported well beyond the value of their contributions. And so on an on…. and on.

  22. derrida derider
    September 10th, 2014 at 15:13 | #22

    @Peter Rickwood
    To the extent that people care about how much money their heirs will get, an estate tax is indeed a tax on their own labour. To take the argument to its extreme, if you care just as much about your heir’s ability to consume goods as your own the effect on incentives for you to accumulate wealth is the same.

    In fact of course people – especially those with sufficent narcissism to build a fortune – don’t generally care as much about their future heirs as their present selves so this is one argument for death duties. Death duties do have some serious practical problems. They’re generally easy for the richest to evade (that is, unless they are English aristocrats foolish enough to keep all of their wealth in highly illiquid and easily measured ancestral land. You can’t ship Downton Abbey to the Cayman Islands without someone noticing). Also they can never raise much money compared to income or consumption taxes anyway because death happens a lot less often than fortnightly paydays or buying some goods. Still, it’s one reason I think they’re worth having.

  23. J-D
    September 10th, 2014 at 18:37 | #23

    @Ikonoclast

    The USA would not respond to an increase in tax rates in Australia — even a drastic increase in taxation — by attacking Australia and reducing it to rubble. You’re just making that up.

  24. ChrisH
    September 10th, 2014 at 18:41 | #24

    Jeroboam says at #21 that a problem with high income earners paying over 70 per cent marginal (income) tax is supporting the dimmer and less functional: but only once you ‘admit non-family’ and are ‘piously multicultural’. Apparently supporting the weak depends, to Jeroboam, on their kinship. Or is that their race and religion?

  25. Newtownian
    September 10th, 2014 at 19:03 | #25

    plaasmatron :
    Interesting take on this theme in the context of Superannuation/Aged Pension over at New Matilda.
    https://newmatilda.com/2014/09/09/super-idea-better-retirement-plan
    Info like this suggests that the system is being rigged. The average guy feels under pressure from the “budget emergency”, while the expanding world money base is “pay-walled” to remain with the 0.1%.

    Its great to see you mentioned the superannuation issue as a serious equity problem and provided a link to the Matilda article. The only problem is the proposed progressive solution – taxing superannuation to pay for universal pensions – seems to me a band aid which is far from simple which would create a backlash and bigger mess due to the scale of the problem already created in the form of the superannuation industry.

    It isnt just the concessions on the contributions (about $100 billion per year) which are a problem but also the scale of the whole superannuation pot. The latter would need to be extensively taxed but this raises inter- (living) generational equity issues. Separately you would likely see undermining of superannuation industry as it currently exists necessitating a coherent transition to whatever replaces it – which would likely produce chaos. A non trivial issue would be what to do about people on defined benefit systems e.g. teachers commonwealth public servants and of course politicians. Could you just unilaterally change their benefits under a claim of equity?

    Regarding the scale of the superannuation pot/vested interest/fighting fund I heard some rough figures 18 months ago which are consistent with ASFA stats http://www.superannuation.asn.au/resources/superannuation-statistics – $1.85 trillion not counting defined benefit systems ‘growing’ currently at 15% per annum.

    What the future holds is hard to say obviously given the potential for rule changes but the trend suggests a pot of $4-6 trillion sometime in 2020-2025. I struggled with what this ludicrous ‘capital’ figure meant until I found this – you mentioned the evil 0.1% of which the most notorious are the billionaires. And this is before you count the moneys extracted by the finance so-called industry and the massive power/vested interest worth reportedly up to 40% of all the gains in the value of that pot. By comparison it appears the total assets of the world’s 1426 billionaires is about the same magnitude – $6 trillion http://en.wikipedia.org/wiki/Billionaire.

    The difference is Australian superannuation vested interests would focus the power that this money buys mostly locally – and its supporters will be people in situations like mine who feel increasingly insecure (hence the rise in SMSFs) and whose future 20 to 30 years (optimistically) is tied to the status quo.

    In conclusion – its great you raised the superannuation issue. But is it just the 0.1% who is the problem here? I think not.

  26. Megan
    September 10th, 2014 at 19:06 | #26

    @ChrisH

    He is a self-confessed sock-puppet/troll.

  27. Ikonoclast
    September 12th, 2014 at 06:37 | #27

    @J-D

    What I mention would not be a mere tax increase but a major limitation on oligachic capitalist power and a step on the road to worker socialism. The USA would not permit a country in its power orbit to do that. Or haven’t you noticed what happens to countries that;

    (a) do something the US doesn’t like; and
    (b) don’t have their own nuclear deterrent?

  28. Ivor
    September 12th, 2014 at 07:34 | #28

    @J-D

    Just so we are clear. Exactly where did anyone say that:

    The USA would respond to an increase in tax rates in Australia — even a drastic increase in taxation — by attacking Australia and reducing it to rubble.

  29. Ernestine Gross
    September 12th, 2014 at 23:45 | #29

    Without wishing to be disrespectful, I cannot find any use of the Laffer curve. IMO, the Laffer curve belongs to the 2D economics, aptly ridiculed by Newtownian. The curve, by construction, has a maximum and this is interpreted as the maximum tax revenue. I am told, this maximum is of interest because it would provide the maximum revenue for income redistribution. Maybe. It could also provide the maximum revenue for expenditure on war machinery or expenditure on the salaries of advisers who sing the song that is in fashion. Why “the” Laffer curve? Is there only 1 income distribution and it is perfectly equal? If not, what is “the” Laffer curve supposed to represent? An economy with 1 individual? In short, all the important dimensions of an economy are left out and, for reasons given in JQ’s post, the graph has no intrinsically interesting properties.

    There is a paper by Hal R Varian, titled “Equity, Envy, and Efficiency”, JET, 9,63-91 (1974), which I came to read only recently. He makes precise the notions of equity, envy and efficiency as well as the concept of a ‘fair’ allocation in terms of preferences. He discusses his notion of ‘fair’ in relation to Rawls’ notion of just society. Varian also contrasts his approach with social choice theory.

    I do not have sufficient knowledge about Rawls’ theory to form an opinion. I’d greatly appreciate JQ’s and others opinion in this regard

    I like Varian’s approach. While it may not be directly helpful for a specific policy question, it is, IMO, very helpful in providing a framework for policy formation and public discussions. For example, results which hold for an exchange economy (no production), do not extend to an economy with production (what does a Laffer curve have to say on this point?); a welcome reminder that a reference to ‘a market economy’ says essentially nothing.

  30. Jereboam
    September 13th, 2014 at 01:02 | #30

    @ChrisH discreetly
    Race can sensibly be regarded as extended family so it is never surprising if people’s feelings for who is outside the tribe or family are attached to some of the conventionally used msrkers or indicia of race. And religion would be just as likely in many countries. Quite a lot of rich Scandinavians didn’t wait for a lot of Middle Eastern Muslims to turn up in their midst to prove that support for the Scsndinavian type of welfare state was special and associared with the feeling that people in their country were family. They had views, not publicly expressed, about class
    and discreetly went about establishing foreign connections, living well on expense accounts and using tax loopholes that, admittedly, showed less than complaisant willingness to cough up high taxes long before the racial, religious or other ethnic factor spread their distaste for high taxes to the average Scandinavian.

  31. Jereboam
    September 13th, 2014 at 01:04 | #31

    Sorry sbout the word which went astray…

  32. J-D
    September 14th, 2014 at 09:07 | #32

    @Ikonoclast

    You ask me whether I have ‘noticed what happens to countries that;
    (a) do something the US doesn’t like; and
    (b) don’t have their own nuclear deterrent?’

    Lots of countries have done things that the US didn’t like. In some case the US has attacked those countries and in some cases it hasn’t.

    The US did not like it when Iran held US diplomats and others hostage in the US embassy in Teheran, but it did not reduce Iran to rubble (although one Iranian was killed during the abortive US attempt to rescue the hostages).

    The US did not like it when New Zealand banned the entry of nuclear-powered and nuclear-armed warships, effectively ending US naval visits to New Zealand pots, but it did not reduce New Zealand to rubble (although the US did announce that it was suspending treaty obligations to New Zealand).

    Did you not notice those events? But perhaps that question is unfair. Perhaps you are younger than I am and you do not have the personal recollections of those events that I do. Still, they are well documented and you can look them up in sources you trust if you don’t want to take my word for it.

  33. J-D
    September 14th, 2014 at 09:08 | #33

    @Ivor

    That’s what I thought Ikonoclast meant. Did you have a different understanding of Ikonoclast’s comment? Can you explain how your interpretation was different from mine?

  34. J-D
    September 14th, 2014 at 09:09 | #34

    @Jereboam

    It is not correct to say that race can sensibly be regarded as extended family. If there are people who regard race as extended family, what they are doing is not sensible.

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