Wednesday, April 23, 2014

A Recipe For Disaster

 "In the early stages of the state, taxes are light in their incidence, but fetch large revenue. As time passes and kings succeed each other, they lose their tribal habits in favor of more civilized ones.  Their needs and exigencies grow, owing to the luxury in which they have been brought up.  Hence they impose fresh taxes on their subjects, and sharply raise the rate of old taxes to increase their yield.  But the effects on business of this rise in taxes makes themselves felt.  For businessmen are soon discouraged by the comparison of their profits with the rise in taxes.  Consequently production falls off, and with it the yield of taxation."

Ibn Khaldun (1332 - 1406)
                                 Economic philosopher and historian

That quote, from his book, The Muqaddimah, is an accurate description of economic activity in any age.

The Muqaddimah  is a comprehensive historical, sociological, cultural and economics book.  Its contents have been used in many eras by many economists to describe conditions at those times.

Indeed, that quote above sounds very much like the Laffer Curve, drawn at a restaurant table on a napkin to describe to Ford Administration officials what the implications of tax policies are, and what direction the administration should consider.  Dr. Laffer never took credit for the concept of his sketch, stating then that it had been proposed by Ibn Khaldun.

The Laffer Curve, and Khaldun's quote, demonstrate that there is an increase in revenues to the state only up to a certain point of taxation.  If tax percentages are imposed above that point revenues begin to decline, to theoretically fall to zero.  Of course 0% tax yields nothing to the state, and 100% cannot.  There is some point between at which revenues are maximized however, and that is the desirable point which gubments should strive for.  The Laffer Curve looks much like the nose of a rocket pointing upward and resting on a table.

As Khaldun suggests, businesses reach a point of discouragement when taxes get too high, and production falls off.  As production falls off employees are laid off.  As production and employment decline economic activity does as well, and an economy slides into recession or depression.  All for the wants of gubment.

Adding crushing regulations, economic restrictions, policy impositions, fees, top-heavy bureaucracy and huge gubment influence and oversight to those high taxes and what do you have?


Hence, as Khaldun suggests, the yield of taxation declines and gubment cannot pay for its bloated appetites, society is left with what?

Think carefully.

No comments:

Post a Comment