Rawls, Cohen and the Laffer Hypothesis

I was in Sydney for a fascinating conference on Evidence, Science And Public Policy. It was worth the trip just to hear John Worrall on evidence-based medicine point out this paper on remote retroactive intercessory prayer [1]. Assuming, as appears to be the case, that the study was totally legit (no data mining etc), the obvious question for me was why anyone would think it worthwhile (ex ante) to test this out.

But that’s not the subject of this post.

In discussion at the conference, some reference was made to Rawls, Cohen and incentives, the subject of quite a bit of discussion at Crooked Timber. Rawls and Cohen (and those of us following them) spend a lot of time on the question of whether it is just/desirable to adopt policies that increase the income of the well-off relative to that of the poor, assuming that the result is a Pareto-improvement (everyone is better off, even if the rich gain more). That’s an important question if you want to think about an ideal social order, or to clarify concepts of justice, but there’s a big risk (evident in some of the discussion at the conference) of sliding into the assumption that this question is politically relevant right now. To put it another way, this question is politically relevant only if you accept something very clsoe the Laffer Hypothesis[2], that a reduction in tax rates will, under current circumstances, produce an increase in revenue. Chris Bertram made much the same point in relation to the banking crisis a while back. The term “trickle-down economics” describes the general form of the claim.

There’s very little reason to believe the Laffer hypothesis or equivalent claims about the banks. The reason tax rates aren’t higher and bankers are getting bailed out on hugely generous terms isn’t because Rawlsians have outvoted Cohenites behind the veil of ignorance, or even because lots of economists believe the Laffer hypothesis. It’s because the rich and powerful are, well, rich and powerful. Not only can they promote ideas, however dubious, that serve their cause, they can bring powerful force to bear against any government or political movement that threatens their interest. All of this is obvious enough, but after thirty years in which any mention of these facts has been shouted down as the “politics of envy” or “class hatred”, it may be necessary to restate the obvious.

Again, that’s not a reason not to talk about whether Pareto improvements are (necessarily) desirable and just. I only want to remind everyone to mention, from time to time, that we’ve got a long way to go before we need to worry about this in practice. At the moment, the relevant version of the question is how the left can regain some of the ground lost over the last thirty years, now that the trickle-down theory has failed so spectacularly and obviously.

fn1. Paywalled, sorry. The authors of the study took records of people who had been treated for blood infections some years previously, randomly assigned them to two groups and got a volunteer to read a brief, non-specific prayer for the recovery of the test group, while holding the list of names. It turned out that the prayed-for group had had significantly better outcomes. John Worrall presented it as an data point against believing in randomised trials as the gold standard of evidence based medicine. As I said, my main puzzle is, assuming that the results were just a 100-1 fluke, why the authors thought of doing this in the first place, given the low probability of a publishable result.

fn2. Laffer didn’t invent the curve to which his name is commonly attached, but he can reasonably claim responsibility for the hypothesis that the US in the 1980s was on the declining part of the curve.

74 thoughts on “Rawls, Cohen and the Laffer Hypothesis

  1. You are assuming, John, that negative results are unpublishable. For all I know that might be true, but, if so, it would be unfortunate.

    But perhaps demonstrating that intercessory prayer did not work would be a valid research outcome?

  2. Pareto improvements are good by definition so there is no need to postpone a discussion of them.

  3. Joseph Clark Says:

    Pareto improvements are good by definition so there is no need to postpone a discussion of them.

    That’s not what welfare economics is about. Pareto efficiency is separable from equity only to a small extent in theoretical models that largely have bugger all to do with realty.

    Assuming zero transaction costs, complete markets and symmetric information…

  4. “we’ve got a long way to go before we need to worry about this in practice….now that the trickle-down theory has failed so spectacularly and obviously.”

    Isn’t that a contradiction?

    And, so sorry, where’s the obvious and spectacular failure?

  5. Responses to the GFC so far have not convinced me that neoliberalism has lost any power at all. The neoliberals are still running the show. The bailouts seem to be tailored to save the rich for the most part.

    Honesty forces me to admit the middle class are getting help too. I guess the rich figure they still need the middle class who are essentially the servants who run everything for the rich.

  6. SJ#3

    You make sense to me.

    Transaction costs are everywhere….complete markets and symmetric information???. Hello? Its a chaotic jumble of dodgy information out there.

    I just love these theories where you note shaky assumptions in the fine print. Bit like an insurance contract.

  7. Jarrah @6: The obvious and spectacular failure is that it hasn’t happened.

    Real income at the bottom end, and the middle pretty much too, has been more-or-less static for a few decades. If it’s trickling down somewhere, then where? Meanwhile a number of undesirable social indices have increased, eg, rates of clinical depression. We all love simple explanations – biologically, these are low energy computations that feel good – but apparently there’s some complexity out there fouling our pristine insights.

  8. As for the so-called Laffer curve effect, although it has become somewhat fashionable to mock this there is plenty of evidence to support this thesis.

    Again, it must be stressed that the Laffer curve does not posit that lower taxes will always yield higher revenues. It merely posits that in some situations lower taxes will actually yield higher revenues.

    During the 1980s Australia reduced the top marginal tax rate from 60% to 47%. What was the result of that? Did government revenues decline heavily? Did the budget deficit increase? Was the government sheepishly forced to hike the tax rate back to 60% in order to avoid financial ruin? No no no.

    In New Zealand the top tax rate was reduced from 66% to 33% during the 1980s. Given that public finances were already in bad shape, why didn’t this massive tax break for the rich bankrupt the country?

    Of course, the obvious question is: if a government could raise more revenue through a lower tax rate, why would anyone in their right mind set the tax rate higher?
    There are a couple of reasons:
    – the electorate doesn’t understand economics, so it is harder to explain these arguments. It is much easier to resort to populist arguments and exploit the politics of envy by complaining about excessive breaks for the rich
    – if higher tax rates lead to more evasion and less revenue collected, why should the wealthy or influential care less?
    A perfect combination of cynicism and naivete.

  9. During the 1980s Australia reduced the top marginal tax rate from 60% to 47%. What was the result of that? Did government revenues decline heavily?

    They declined by around 13 per cent of the amount of income subject to the top marginal tax rate. That is, any Laffer-type effects were negligible, which is consistent with US experience.

    Of course, the loss due to the cuts was offset by bracket creep and by the introduction of the capital gains tax, so total revenue kept rising.

  10. Monkey’s Uncle says

    “During the 1980s Australia reduced the top marginal tax rate from 60% to 47%.Did government revenues decline heavily? Did the budget deficit increase? ”

    Funny you should mention that Monkey’s Uncle. Inequality has been rising ever since (in actual tax incomes, in taxable tax incomes and a a range of other inequality measures).

    The Budget also went into surplus because successive governments ironically since the 1980s alo, flogged a whole pile of capital, land and other assets under the sun our government once owned, and where is it now ??

    Nothing quite like drawing your attention to privatisations which you seem to completely overlook making the comment you made above. Where exactly would the Budget have been without all those asset sales (after giving the rich an almighty tax cut in the early 1980s?? It was a huge reduction by any standards and tax measures made for everyone else came nowhere near offsetting the gain by top tax incomes).

    That, in short, was a stupid and destabilising move.

  11. It merely posits that in some situations lower taxes will actually yield higher revenues.

    Yeah, but under exactly what conditions? Have they ever actually occurred in the real world? It appears to me that you’re extrapolating actual public policy – with real effects – from some kind of two bob theory. Sure, there must be some hypothetical situation where reducing taxation might actually raise revenues, but does that mean we should do anything? Because if it does, I’ve got lots of great policy ideas that should definitely be implemented, eg, my No Tax for B Surnames policy is a ripper.

  12. Pareto efficiency and Pareto improvement.

    While the definitions of the above concepts are sometimes introduced in conjunction with the first fundamental welfare theorem (pertaining to a Walras equilibrium), it is not true (contrary to the content of at least two comments) that the definition depends on the conditions of a Walras equilibrium (see for example second fundamental welfare theorem).

  13. “Rawls and Cohen … spend a lot of time on the question of whether it is just/desirable to adopt policies that increase the income of the well-off relative to that of the poor, assuming that the result is a Pareto-improvement (everyone is better off, even if the rich gain more). ….”To put it another way, this question is politically relevant only if you accept something very close to the Laffer Hypothesis[2], that a reduction in tax rates will, under current circumstances, produce an increase in revenue.”

    I accept the opinion of our host on what is politically relevant under current circumstances. However, I am not prepared to accept that the Verbal-theoretiker (eg Austrians, supply-siders, ….) should have so much influence on policies.

    There are several versions of Pareto-improvement. One is the requirement that at least one person is made better off (in terms of consumption of commodities) without anybody else being made worse off. Given a top marginal tax rate of say 67% (something like this before the Verbal-theoretiker gained the ears of Reagan and Thatcher and a few others) then a lowering of this top marginal tax rate to say 45% makes those in this tax bracket better off without ensuring that the remaining members of the society are not made worse off. The Verbal-theoretiker people ask us to believe that a Pareto improvement has occurred. I don’t believe it because they don’t have as much as one theorem which gives conditions under which it is conceivable that it could work. By now there is ample empirical evidence that it did not work. And on this point the dreaded neoclassical mathematical economic models do give some insights as to why it didn’t work. Two give only two examples: 1) The minimum wealth condition (related to income distribution) has been neglected. 2) The conditions on risk aversion in financial markets have been ignored.

  14. “All of this is obvious enough, but after thirty years in which any mention of these facts has been shouted down as the “politics of envy” or “class hatred”, it may be necessary to restate the obvious”

    And this is another reason why the Verbal-theoretiker’s influence on policies should be curtailed. These people come up with phrases or sentences that can be copied by non-economists who then proffer psychological (maybe I should say pseudo-psychological so as not to offend the serious people in this area)phrases such as “politics of envry” and “class hatred”.

  15. Ernestine,
    As always I appreciate your ability to take a simple point and make it incomprehensible to ordinary people. You’ll make a fine economist some day!

  16. Joseph #2
    Perhaps I’m reading less into what you said than what you meant.
    A Pareto improvement is only ‘better’ if you assume that ‘more is better than less’ and argue successfully that our preferences are independent (or should be). Economists have regarded these as the safest minimum value judgements they could make that would permit useful policy advice while being as scientific as possible.

    They may have been wrong, and the problem may have started at step 1. It seemed a good idea at the time. As ‘more’ can be quantified, it permits measurement and other scientific-looking stuff.

    Efficiency (Paretian or any other kind) does not mean good. A fact does not imply a value. We *assume* that more is preferred to less and pretend that people in fact have no preferences about the distribution of these goods, and clearly this latter assumption is factually false.

    At best, PE means potentially good in a narrow but mildly interesting sense: if there is more output then some new allocation exists can make everybody better off. (The only exception is if an improvement in A’s welfare in terms of getting more of good X causes B enough disutility to override the gain in X (s)he obtained.)

    I vaguely recall a diagram with goods on one axis and equity (!) on the other, with an indifference curve on it: there was a tradeoff between goods and equity and some supposed ‘optimal’ outcome. Interesting, but equity involves more than “equality”.

    What matters more to me than how much you have is how you obtained it. This is qualitative in the light of all the relevant circumstances, not quantitative — and not capable of being reduced to any formula or slogan (e.g., Rawlsian).

  17. Joseph Clark, it seems to me you underestimate the abilities of “ordinary people”.

  18. Bruce,
    Pareto improvements are defined in terms of preference not quantity. Unless people prefer less preferred commodity bundles Pareto improvements are just plain good. Pareto optimality is another matter.

  19. Jim Birch at 15 “Yeah, but under exactly what conditions? Have they ever actually occurred in the real world? It appears to me that you’re extrapolating actual public policy – with real effects – from some kind of two bob theory.”

    Jim, I cited two “real world” examples in my post you refer to. I could probably cite many more examples if I had more time. Such as the constant increases in federal government revenues over the past several years despite successive tax cuts.

  20. Alice @ 14, regarding privatisation I don’t think the Hawke-Keating governments began selling major assets until the late 1980s or early 1990s.

    The period I was referring to regarding the adjusting of tax scales and the budget was around the mid 1980s. So it has little relevance to the comparison I was making.

  21. #24Actually it does have a lot of relevance Monkey’s Uncle.

    You didnt specify what years the budget was presumably unaffected but lets look at it?. I am copying two links for you. Most privatisations were carried out the 90s, I agree – so what happened before (in the 1980s after that nice tax cut was delivered to the already rich?). See below

    Click to access bu_1297_2.pdf

    Here is a quote from another source

    Click to access 01_Debt.pdf

    “There were two further episodes of debt accumulation, and subsequent reduction, during the 1980s and early 1990s driven by periods of weak economic growth and associated budget deficits. From the mid-1990s, as the Australian Government’s fiscal position improved, gross debt declined steadily as a share of GDP.”

    So clearly debt accummulated in the 1980s after that very accommodating tax cut was delivered to the already rich in the early 1980s. From 1990 we started selling off public assets which would have masked any rising deficit nicely.

  22. Monkey’s Uncle #12 –
    your precise comment was

    “During the 1980s Australia reduced the top marginal tax rate from 60% to 47%. What was the result of that? Did government revenues decline heavily? Did the budget deficit increase?

    From the source I have given you at 25 (RBA source)

    “During the early 1970s net debt was mainly negative and reached lows of -3.1 per cent of GDP. During the first half of the 1970s budget surpluses averaged 1.7 per cent of GDP, while in the second half, there were budget deficits averaging around — 1.6 per cent of GDP. By 1979-80, net debt was around 4.7 per cent of GDP.

    Net debt reached 10.4 per cent of GDP in 1985-86. It took only three years (from 1986-87 to 1989-90) to reduce net debt by around 6 percentage points of GDP. Across those same years, the underlying cash balance averaged around 0.6 per cent of GDP.”

    So yes, then government budget deficit did indeed increase in the 1980s (seeing as you wanted to narrow your argument to that decade later in your comment at #24).

  23. Monkeys Uncle at 12 and 25

    Furthermore – the speculative bubble in the 1980s (the first of these damn things in decades) was likely to have poured cash in to the governments budget (once more dangerously seductive to governments).

    I dont see the period 1986 – 1989 as being particularly productive or any sound measure of underlying government budget strength …after all, that period spawned Skase, Bond, Jodie Rich (1st time around), Rivken, Adler and a host of others and then the market crashed. “Greed is good” ran away to Spain before it could get put in jail.

    Its just like now – JHs “magnificent surplus” (irony and sarcasm) evaporated.

    We need to get the effect of volatility through poor economic management out of the picture. The tax cut to the rich in the early to mid 80s was very much part of that poor economic managment. Poor fools, what were they thinking? The rich just did even better out of the next boom and gambled to even greater heights. I dont need to suggest that it wasnt sustainable either. I think most people know that now.

  24. # re 17 and 19. I fully agree with Ernestines two final points in the last para made at #17 and had Joseph #19 half the knowledge of economics that Ernestine does he might not have found those comments incomprehensible (19).

    Greenspan has acknowledged a “flaw” in his models and to date I have heard nothing on Greenspans versions of the “flaw” or exactly what the “flaw” is in neoclassical economic models of self regulated markets. Id like to hear more on the flaw and its time some discussion of the weaknesses occurred.

  25. Alice,
    I’m just stating definitions. Let’s not get into childish contests about who knows more economics.

  26. Pr Q says:

    It’s because the rich and powerful are, well, rich and powerful. Not only can they promote ideas, however dubious, that serve their cause, they can bring powerful force to bear against any government or political movement that threatens their interest.

    All of this is obvious enough, but after thirty years in which any mention of these facts has been shouted down as the “politics of envy” or “class hatred”, it may be necessary to restate the obvious.

    My general rule to predict the behaviour of a progressive democratic polity in a regressive catallactic economy is that our elite representatives tend to take the path of least resistance between:

    the populace’s…Left-leaning political opinions and elites…Right-leaning policy interests.

    The only exception to the elites Right-wing tendency is the Culture War where most elites sympathise with the Left-liberal position. But this exception proves the “anti-populace elitist” rule, since the populace is well to the Right of the elites in cultural identity matters. It was only a major Right-wing populist backlash from Hansonites that policy to move in line with public sympathy on this issue.

    So we have an elite dominated polity – Quelle Surprise.

    The only thing that will arrest this regressive elitist tendency is counter-valing power from populist organizations such as unions, churches and community groups. Certainly exquisitely argued points between dead philosophers wont prise certain peoples fingers off the loot.

  27. Strocchi – you are droll (and funny)! I agree but the elites really dont want to push people too far (only as far as they can get away with and they have been pushing too far..they need to stop the campaigns of misinformation and shonky economics (good for the few and not the economy) and reign themselves in. You can wake up a sleeping but cranky bear like that.

    AIG telling its staff to wear no company logos and plain clothes while G20 is on. Demonstrators outside execs houses smashing their cars and windows (ex CEO Bank of Scotland)? They may be elites and able to command resources but being merely elite has not protected some elites in history has it? Its no guarantee they can avoid an angry mob.

  28. Alice,
    Having bizarre conspiracy theories about ‘elites’ is one thing. Supporting violence against people is quite another. Is that what you’re doing?

  29. Monkey’s Uncle @ 23, you have not taken into account the various other tax increases while income tax was being reduced. FBT was only one. The Medicare Levy was introduced in 1986, along with FBT. Capital gains tax was introduced in 1985. HECS was introduced in the late 1980s, and the HEAC preceded it. It’s a little disingenuous to claim that the cuts in income tax only lead to a mild decline in consolidated revenue without reference to the other taxes that were introduced at the same time.

  30. # 33 Joseph Clark Says: March 31st, 2009 at 9:20 pm

    Alice, Having bizarre conspiracy theories about ‘elites’ is one thing.

    One does not have to rely on conspiracy theory to believe that economic elites have gone to extraordinary organizational lengths to further their own interests. This sort of thing has been done in plain view.

    Financial markets until recently were full of boutique hedge funds, tax-efficient accountants, HVI wealth managers and so on. All designed to concentrate wealth amongst those with institutional privilege. Similar schemes operated at a higher political level to crony capitalists to sell off public property at cheap rates to insiders and to offer tenders on contracts at exorbitant rates.

    And of course we then had on top of this the financial pump-priming by central bankers to support financial agents gross leveraging of securitised assets. Which in turn validated the high-powered hustling of usurious credit instruments by unscrupulous hustlers in minority neighbourhoods. (I call this the “debtquity and diversity” play).

    More to the point, as Pr Q points out, there has been a massive concentration of financial players in densely populated financial precincts in all the great metros of the Northern Hemisphere. This is not what we would expext given that financial activity could be easily and cheaply disaggregated using computer networks.

    The obvious inference is that the social concentration facilitates face-to-face interaction, OTR with no paper or pixel trail. Quo Buono is not a “bizarre” hypothesis, but its a conspiracy, alright.

  31. jack,
    It’s all true. Us capitalists have been running the scam for centuries. First we steal all the money from the workers by exploiting them then we finance right wing think tanks to brainwash the portion of the population that hasn’t been pacified by consumerism (us again!). Sure, there’s a few loudmouths who have us figured out but we can easily shout them down as cranks using our media mouthpieces.

  32. 33#Joseph – says
    “Alice
    “Having bizarre conspiracy theories about ‘elites’ is one thing. Supporting violence against people is quite another. Is that what you’re doing?”

    Well Joesph, I dont see much evidence above that I was “supporting violence” but its an interesting twist youve thrown in here (and it is a royal twist). I will say that political instability can and does arise from underlying economic instability (everywhere in the history books Joseph – not me “supporting violence”).

    If I think that elites are running the show I certainly wouldnt be alone. Roosevelt complained of the very same thing after the crash of 29 where he complained about the magnitude of surpluses that were extracted by the few who had the power to manipulate markets that it became top heavy and fell on itself (the US top 50 families at that time controlled extraordinary wealth and market power). The US did not implement the Sherman anti trust laws for no reason. I dont see much difference between the CEOS and executives at Merryll Lynch, AIG, Goldman Sachs or Lehman except time Joseph. Same modus opernadi. Surpluses of the magnitude these executives have been extracting for their own private benefit, I would call the excessive and unrestrained behaviour of an elite oligarchy.

    Of course the elites have been engaged in conspitaorial activities Joesph and its naive to imagine otherwisse. Those “conspiratorial activities” (the closed shop that is their self remuneration process and the market power which they can exercise to manipulate share prices up or down) have been against the best interests of employees, creditors and shareholders as well as the healthy functioning of a multitude of economies.

    Its about balance in your agruments Joseph – and that doesnt include false accusations of “carrying conspiracy theories” or “supporting violence.”

    These are naive comments you make.

  33. Is it possible for people to stop using the term “elites” whether left-wing or right-wing? I think it is now quite outdated and inaccurate. A more accurate term for the wealthy and powerful who dominate our society would be “power cliques”.

    Webster’s dictionary defines “elites” as being “a group of persons who by virtue of position or education exercise much power or influence”. It seems to me that many of our most powerful are not intellectual and influential – we don’t believe a word they say – but they are powerful and get their way with government. Academics are not elites either. Sadly, they have declined greatly in influence in my lifetime. One media shock-jock has more power than 100 academics. Needlesss to say, its unlikley the shock-jock will have a PhD.

    Second, I agree with Bruce @ 20 on Pareto Optimality – who cares about it? It guarantees neither efficiency nor equity. The more I study philosophy and realise just how many different views exist on distributive justice, the less I pay attention to Pareto. Plus, it is so easy to cheat Pareto in any analysis by only considering the short term. You can even get a change that makes everyone worse off in the long term to look Pareto optimal in the short term. Pointless.

  34. I should add that in other respects I strongly agree with Alice above; I just don’t like this term “elite”.

  35. #38. I was just making sure. And I wasn’t specifically refering to you John. However can I take it as given that in your book the neoliberal project that has supposedly brought the global economy to ruin has nothing at all to do with tax cuts. The latter having never happened. In other words we might blame deregulation (if we must call it that depite some apparent absurdity) and privatisation but we can’t blame tax cuts that didn’t happen. And of course can I take it as given that you accept that we have never really tested the laffer curve hypothesis because we never actually had cut taxes.

  36. # 37 Joseph Clark Says: April 1st, 2009 at 12:33 am

    jack, It’s all true. Us capitalists have been running the scam for centuries. First we steal all the money from the workers by exploiting them then we finance right wing think tanks to brainwash the portion of the population that hasn’t been pacified by consumerism (us again!).

    Joseph,

    I am no way opposed to industrial capitalists who do their job to maximise corporate profits. Even if that means sacking workers en masse. Shedding labour allows companies to move operations overseas or substitute machinery. The former raises global living standards, the latter raised national productivity.

    For a while back in the nineties I was the brother-in-law of Sue Morphett. She struck me as being a perfectly decent person and a top-notch professional businessperson.

    My beef is with financial capitalists who, in Warren Buffet’s memorable formulation, “make money off, rather than for, investors”. Financial capitalists by and large do not produce wealth. They are engaged in a struggle to re-distribute wealth, away from industrial capitalists and political statists.

    This form of capitalism is like a virus that parasticially infects and infests the Body Catallactic, filling the subject with a phony euphoria which ultimately leaves him feeling listless and apathetic.

    I am also a big fan of Right-wing think tanks that keep an eye on government waste, inefficiency and corruption. Governments are just resource-acqusitive firms constituted by men who are not angels. So they need to be watched and be held accountable.

    In AUS, the CIS perform this function admirably. Andrew Norton is pretty close to being the best academic blogger in Australia. They were well ahead of the curve in bringing out Friedman and Hayek. Its just that they have treaded a lot of water ideologically speaking ever since.

    Undoubtedly the onward march of statism means that there will be a big need for Right-wing economists to monitor dysfunctional state apparatus. Just imagine if the kind of people now hanging onto the NSW ALP were suddenly put in charge of your business. Scary thought.

  37. Socrates Says: April 1st, 2009 at 9:50 am

    I should add that in other respects I strongly agree with Alice above; I just don’t like this term “elite”.

    The term “elite” is indispensable for the analysis of institutions in the post-modern age. Once upon a time, in the “good old days” of “old school tie” the elites were very conservative and traditional. That has completely changed now.

    This is because of the pervasive and perpetual influence of tertiary universities in meritocratically selecting and sorting the managerial and professional personnel who staff major institutions. And the inevitable proliferation of incomprehensible jargon that accompanies their rule. Think MBAs.

    Virtually all contemporary elites subscribe to some form of post-sixties post-modern liberalism. This liberalism can be cultural Left-liberalism or financial Right-liberalism or sometimes both, as in the case of libertarians. One noticeable exception is technical elites, who still have a tendency to be boring nerdy “organizational men”.

    Post-modernist liberalism (c ~1970-~20??) is quite distinct from the modernist liberalism (c ~1770-~1970). The latter sought to develop individual self-government, the former seeks to escape institutional accountability.

    Post-modern liberalism is very convenient for uni-educated elites as it it tends to be sold as a technical doctrine laid out by the experts. “Just give us, or our ‘clients’, a free hand and we will do the job and society will be better off”. But in fact “a free hand” variously translated into “self-regulation”, “risk-management” or “harm-minimization”, “self-determination” turns out to be a licence for free-for-all.

    This suits the elites and their clients in the uber- or unter-classes who are free to “clean up” by appropriations from the wealthfare or welfare state. And if the thing degenerates into a mess then there is always a federal bail-out or intervention.

    But elite liberalism of this kind is distrusted if not despised by the general populace. This is comprised of “working familes” who have to work in a lower-level supervised, or middle level supervisory, occupation for a living. They have a much less liberal, more “corporal”, philosophy of government than special elites because they are routinely held accountable for their deeds and mis-deeds.

    They daily see elites and their “clients” getting off scot-free with rip-offs, rorts and rackets. That is why tabloid media aimed at the general public tends to be more oriented towards policing and punishing misbehaviour. Think Daily Telegraph, Sun-Herald, 2UE, 3AW, ACA, Border Security.

    The elite-populace political conflict is endemic given the tendency of post-modern institutions to suffer deformations and degenerations of accountability. I therefore predict that demagogues both Left and Right will continue to tap into latent populism in the general public.

  38. Pr Q says:

    As I said, my main puzzle is, assuming that the results were just a 100-1 fluke, why the authors thought of doing this in the first place, given the low probability of a publishable result.

    If the odds on getting such a study published were 10:1 and the odds of getting a signficant result were 100:1 then the overall odds of the hypothesis getting favourable attention was 1000:1.

    Perhaps someones prayers were answered?

  39. Socrates #41

    If you dont like the term elites I can probably think of better ones like “wealthy industrialists” or something like that.

    However, there are much more appropriate decriptors for the elites right now but I cant tell you here because Id be breaking the no course language rule.

  40. TerjeP

    ” And of course can I take it as given that you accept that we have never really tested the laffer curve hypothesis because we never actually had cut taxes.”

    What a nonsenese. Did you actually read previous posts? The top marginal rate was cut from 60% to 47 %. No other tax rank got ebenfits that made up for this. Rising inequality all round. If thats what “selectively cutting the tax rate” does Forget trickle down – it trickled alright but not down” In fact it didnt trickle at all – it seeped and banked up like a broken sewerage pipe.”

    If you are still in favour of testing the laffer curve TerjeP – it should be renamed the “laffin stock” curve.

  41. And forget futher tax cuts Terje P. I dont mind them sacking every middle layer of the public service and above almost, but they can replace that with some teachers, nurses and road builders in my book. Run it on military lines – a damn lot of soldiers but only a few majors and generals.

    Thats why the public sector is wrecked – too many chielf and not enough Indians and all the chiefs are trying to cosy up to PPP deals where the public gets ripped off eg you drive from outer Sydney to Inner Sydney. You drive 10 ks on an overcrowded transit route. You drive two ks on a PPPs road and pay $7 each way for the privilege. How many two k strips of road are there in Sydney to get to work? Who makes the money – no one ut seems or not enough anyway. Who loses – the poor people who have to get to work.
    Hardly useful is it? Hardly helpful to the economy? Another short term vision by government. Oh wow, we might actually make some dosh on this PPS deal”??. Sack the deal makers. They are running us down in every way in terms of infrastructure provision with this short term efficiency from privatisation ethos. Cough up, provide the infrastructure for free with our tax funds directly (not the damn super or trips or benefits) or risk chronic government turnover due to chronic voter dissatisfaction. The public knows what it wants and what infrastructure is needed – politicians should just deliver or leave.

    TerjeP – get I dont mind people in the public sector being sacked but they have been sacking the wrong end and hiring at the wrong end.

  42. Alice – As I see it the conversation thus far has run roughly like this.

    JQ (#0): The Laffer hypothesis was proved false because we had tax cuts and we didn’t see revenue rise.

    Monkeys Uncle (#12) Not really disproved because income tax cuts didn’t lead to any decline in revenue.

    JQ (#13): Revenue actually increased. However it increased because we had other new taxes like FBT and capital gains tax.

    TerjeP (#35): So we never actually had tax cuts.

    JQ (#38): Agreed.

    TerjeP (#42): Doesn’t comment #38 contradict #0?

    Alice (#47): You can’t read. Blah, blah, blah.

    If during any historical period we are interest in the effective tax rates were cut but revenue didn’t declined in any sustained way then it seems self evident that either:-

    i) tax cuts were shown to be possible without harming revenues. This is good becaue it means we can have our cake and eat it. A larger private sector income with no harm done to the public sector.

    ii) we never had tax cuts so the hypothesis hasn’t been tested.

  43. Sorry, I’ve been MIA on this thread for a bit. Have had to work longer hours. Although once I hit the top marginal tax rate this year, I will start cutting back my hours (thereby further proving the Laffer effect).

    Some posters have brought up the issue of past income tax cuts during the 1980s being accompanied by increase in other taxes (like the introduction of CGT, and increases in consumption taxes).

    Yet this is really a case of dancing around the point. The main reason why governments looking to increase their revenues decided to do so by expanding their revenue base rather than increasing the rate of individual taxes is precisely to avoid any Laffer-type effects of excessive tax rates.

    If there is little Laffer effect on incentives or evasion, it would be much simpler to raise more revenues by raising existing taxes (like income tax) than expanding the revenue base.

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