Archiv der Kategorie: Allgemein

Allgemein

Now Wash Your Hands!

I suppose it’s quite unusual for a German to agree with a headline of the British tabloid “The Sun“. But here I do (I did not bother to read the rest of the article – so if I say headline, I mean headline…). I think President Chirac has clearly sent the wrong message to the world about his motives for military restraint in the ongoing quarrel with Iraq when inviting Robert Mugabe, the Zimbawean dictator, to the Franco-African summit held in Paris this week.

And it’s not just “The Sun”. More important for Mr Chirac, “Le Monde” is also pretty clear in its judgment of the invitation – albeit not mentioning the probable Iraq-related repercussions of such a move –

“La présence de Robert Mugabe à Paris pour le 22e sommet franco-africain est une insulte pour les victimes de son règne arbitraire au Zimbabwe.”

Translation (my own) –

“The presence of Robert Mugabe in Paris for the 22nd Franco-African Summit is an insult for the victims of his arbirtrary reign in Zimbabwe.”

It’s hard to argue with that.

In recent weeks, Chirac has repeatedly proven his political and diplomatic talent, managing to become the key player regarding a second UN resolution explicitly allowing war on Iraq. But starting with the over-the-top and entirely unnecessary threats against Eastern Europe earlier this week, he has shown his uglier face. Drunk on power? I certainly hope he’s not. That would indeed make poor Gerhard a lonely man.

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Allgemein

Laffer’s back.

This week’s “Der Spiegel” is concerned with the increasingly problematic relation between nominal tax rates and actual fiscal revenues in Germany. The Cover-wide headline asks “Why the state is asking ever more money from its citizens but gets less and less of it”? Its a good question – one with a simple theortical answer (that, at least, is something) but a fearful complexity in practice. The simple answer looks like the curve below.


(Source: http://upload.wikimedia.org/wikipedia/commons/thumb/6/6a/Laffer_curve.png/220px-Laffer_curve.png)

It’s the famous “Laffer Curve”, named after Arthur Laffer who was the theoretical support behind Reagonomics. The relationship the curve depicts is pretty straightforward: If you increase the (overall national average) tax rate (t) from 0% the tax revenue (T) will first increase to a maximum (T*) before finally declining back to zero once the tax rate reaches 100%.

The general assumption is that taxes are a disincentive to economic activity and once a certain level of taxes is reached – where the tangent to the curve is parallel to the axis – econmic activity will either stop or be transferred to black (and therefore non-taxed) markets. In both instances, the overall effect for a tax collecting state will be declining revenues.

Thus, if a polity actually knows that it is currently on the right hand side of the Laffer curve, the only reasonable action would be to reduce taxes as it would both increase legal economic activity and the fill the coffers of the state. That’s what Reagan argued. That’s what never happened (that is, if there was any effect at all, the lag was so large attributing it to Reagan became a Republican exercise in epistemolgy in the late 1990s). As so often with a convincing and simple theoretical point, reality is not a friend of those trying to implement such a strategy. There simply is no way of really telling which tax rate would constitute a Laffer maximum.

The Laffer curve is a nice explanatory and propaganda tool, but is not actually helpful in construing useful fiscal policy.

Economics and the people making individual decisions simply are too complicated to easily devise policy around a general idea like the Laffer curve. Check this document for a more technical analysis of the curve and some implications. This is also where I found the beautiful illustrations.

So, knowing about the curve, we can suggest a closer look at tax rates as the simple theoretical answer to the question posed by “Der Spiegel”. But we also know that it is by no means clear it is the right suggestion in the fearfully complex economic reality. Too bad.

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