Most people instinctively understand the truth underlying the concept of the Laffer Curve. It articulates the elasticity of taxable income, which is to say, it shows how the amount of taxable income tends to change in response to changes in the income tax rate. This is because most people understand that they modify their behavior in response to positive and negative stimuli.
We work because someone pays us money to work. We don’t go downtown because what used to be a central shopping gallery full of middle-class people has become a place where Hispanic gangs congregate. We practice economic selection, acting in ways that will allow us to keep what we have and to earn more when it is possible. Politicians and bureaucrats generally refuse to recognize this, which is why they utilize static revenue models that are not only reliably wrong, but predictably overestimate the amount of tax income that will be received.
There is considerable debate about the precise point at which the Laffer Curve provides maximum tax revenues, but as a general rule, if a tax increase causes a reduction in tax revenue, it is safe to assume that the rate has been set on the wrong side of the curve.
And yet somehow, what people understand about tax revenue, they often fail to understand about freedom. Only Paul Krugman believes that setting tax rates to 100 percent will provide the government with 100 percent of the taxable income from which the $899 billion in tax revenues received were calculated in 2010. Most people realize that at a tax rate of 100 percent, the total tax revenue received would probably be a lot less than the $899 billion presently received with much lower rates, because if all of everyone’s income is paid to the government, there will be very little income. Very few people would bother to work anymore.
However, most people think that the more human behavior is legally permitted, the more free everyone will be. But this is obviously nonsensical, as the freedom to develop and forcibly administer the bubonic plague to strangers on the street would undeniably result in a considerable net reduction of freedom for everyone who is infected by the plague. So, various political philosophers have proposed some form of the old aphorism: “my rights end where your rights begin.” Unfortunately, like all aphorisms, this general statement is of very limited utility in practice.
Does my right to permit whomever I want to stay in my house end where your right to sleep wherever you want begins? Probably not, so long as my house is not also a hotel. But it doesn’t matter, for the purposes of this column, where various arbitrary lines must be drawn, the point is that it is an observable fact that some lines must be drawn, some limitations on someone’s freedom must be observed, and those lines are, in most cases, going to be arbitrary to some degree.
This is where the concept of the Laffer Curve comes in handy. I suggest that just as there is an elasticity of taxable income, there is an elasticity of human freedom. My observation is that the amount of actual human liberty tends to change in response to changes in the scope of legally permissible human behavior.
Let us take, as an extreme example, the right to reside freely throughout the U.S. Reducing that freedom for Americans would appear, at first glance, to be a severe and obvious restriction on human freedom. And yet, as those who reside in states near California very well know, the freedoms they enjoy on a practical basis are being reduced as a direct result as the “Californication” of their cities, counties and states by the 225,000 Californians who flee the increasingly bankrupt state every year and then drive up prices and vote to impose California-like government policies on their new neighbors. Their freedom is being observably limited by the general freedom of residence. Is the net freedom a positive or a negative? And what if the annual California exodus rises from 225,000 annually to 22.5 million?
I’m not saying California should be walled off from its neighboring states or that Texas should issue bounties as part of a catch-and-release-in-California program, although it is a tragedy that the framers of the Constitution didn’t possess enough forethought to deny all residents of high-tax states moving to low-tax states the right to vote in their new state of residence. I am merely pointing out that there must always be a point at which more theoretical freedom in law means less actual freedom in action. Contrary to what many anarchists, libertarians and liberals believe, maximizing human freedom of action is more of a complex curve than a simple linear progression.