I have spent my career working in Finance and helping make these decisions for a Fortune 100 company. If you couldn’t already guess the answer to number 3, it should be “yes.”

Now let me illustrate. Let’s say that you have the opportunity to bet on the outcome of a coin toss. If you guess correctly, you win $120. If you guess incorrectly, you lose $100. Since the expected return is 0.5 * 120 + 0.5 * (100), or $10, a rational person would take this bet over and over until he/she was supremely wealthy. Now, let’s add taxes into this decision. If we tax the winnings at 25%, then the expected return drops to 0.5 * 120 * (1-.25) + 0.5 * (100) = (10). Now, you expect to lose $10 every time you take this bet, so you make the decision NOT to invest in this opportunity.
Now, rather than thinking of this as a coin flip, let’s think of it as the decision to expand manufacturing capacity in a region. This decision will have similar expected returns, but multiplied by $10MM–and this project is expected to create 100 new jobs if we do it. If the payouts and taxes are the same, you don’t do the project. However, if taxes are reduced to 10%, then you make the investment because your expected return is once again positive.

If you still can’t see how this illustrates the Laffer curve, then I’ll break it down even more simply so the nay sayers can understand it. If taxes are 25%, how much tax revenue is collected from this project? The answer = $0, because the project is not undertaken. If the tax rate = 0%, then you also collect $0 in taxes. However, if the tax rate is 10%, then your expected tax revenue = $10MM * (0.5*120*+0.5*-100) = $100MM * .25 = $25MM + the tax that you receive from the income on the 100 new jobs. Hey, (0%,$0), (10%, $40MM+), (25%, $0)–if you plot those coordinates on a graph, you actually get a Laffer curve.

I hate to disappoint you academics and people who have never worked in the real world, but this is actually how investment decisions are made and it supports the theory of supply side economics. This example applies to personal tax rates and corporate tax rates. High personal tax rates discourage investment by small business owners (many of whom report business income as personal income). So the next time you wonder why those 100 people are out on the street and looking for work, maybe you should think about cutting tax rates on corporations and individuals who make these decisions–because that’s how you will incentivize these people to take the risks that will create jobs.

It also doesn’t count property and sales taxes (here in California this is well north of 10% of what you spend) and a myriad of other fees (i.e. taxes on telecom), tolls, and other taxes, etc. designed to vacuum money out of citizen’s wallets at every opportunity.

My accountant told me my taxes will be 60-70% and I’m going to quit working. So long, See ya.

As for leaving the country, there is now a “departure” tax that became effective in 2008. You’ll pay about 30+/- % of any unrealized gains you made. North Korea is the only other country in the world I’m aware of that does this.

Talk about a racist comment. These countries are full of Scandinavians. Enough said.

Controlling for culture and ethnicity, the comparison of choice has to be North Korea and South Korea. Same culture and ethnicity, and in 1945, North Korea was slightly ahead of the South in per capita income.

So, to the extent that tax rates make a difference, we can see what happens with sustained taxation to the right of the Laffer curve in North Korea compared to what happens when policies further to the left on the curve are adopted as in South Korea.

As for high taxes, the underground economy in high tax countries is alive and well! Italy is a good example of such a country. It is human nature to KEEP what one works for, and to CHOOSE to give it to those he values. Currently, many US citizens see less and less “value” coming out of D.C., State and even local government. We are NOT getting value for our hard earned money! We are paying for “lemons” instead of lemonade! WE feel like “economic slaves”! If other countries can institute a FLAT tax, why don’t we at least consider it? Our 77,000 page Federal Tax Code is an abomination. Even the IRS counselors cannot fully understand it or “advise” us how to fill out complicated tax forms. When the Iron Curtain fell, some Eastern European countries instituted a FLAT tax. Our elected officials refuse to even consider it. They will see more “Tea Party Marches”, and ticked off citizens. However, I suspect that “some” in D.C. want that, so then they can clamp down on free speech and our right to bear arms. I believe they will find that there are millions of “us” that will NOT put up with that. We are NOT all “sheeple”, and NOT European. We ARE AMERICANS!

That, and the assumption that more government revenue is automatically a good thing. Yes, the Church must get its tithe, even if it’s the Church of Marx.

I’m willing to bet all the leftist idiots posting here believe in the myth of “corporate income tax,” too. No, no corporation would EVER funnel the cost of those taxes to the consumer.

Then, as a an ex-pat Brit now in the US, I’ve been offering similar comments for years: http://news.yahoo.com/s/weeklystandard/20090916/cm_weeklystandard/anunnecessaryoperation_1;_ylt=AtY.WLDVSL.8ihFa7utCQO.7e8UF;_ylu=X3oDMTE2OGQxczZuBHBvcwMyBHNlYwN5bi1yLWItbGVmdARzbGsDZXYtYW51bm5lY2Vz

I’m aware the socialists will insist the article is “biased.” Yes, so are yours. You couldn’t pay me to move back to the UK or any similar third world country. My poorest American friends are better off than my British middle class relatives. Crime is lower here. Food is cheaper. Medical care is better (and I’ve had British National Health Care, American VA care, and private sector care, so unless you’ve had the same experiences, you have no basis for comparison or argument).

Socialism has failed everywhere it has been tried on a mass scale, for the simple fact that without profit, there is no incentive. In a wonderful Star Trek Next Generation socialist utopia, there’s no crime, war, money or dissent…but in reality, there would be no incentive. If you foresee everyone working “for the greater good,” please put down the hash pipe and go see a psychiatrist.

You might go read a little history, such as how the American colonies developed in the first place–by providing goods and services tax free to businesses, that were not available as cheaply in England. This was apparently intolerable enough to ultimately lead to taxes and revolution.

Perhaps it’s time for a new one.

Oh, and Tom–that military you hate? You can thank it for computers, automated manufacture, advanced surgical techniques, space travel, advanced mapping…so please turn off your computer, GPS and never visit a trauma center until you learn to appreciate your moral betters a little more. And it was your socialist buddy 0bama who gave those trillions to Wall Street–more money than Bush spent in 8 years. It must be hard for you to be betrayed by your Savior.

Incidentally, the contractors I served with were doing support tasks the military was not prepared to do, cheaper and more efficiently. It’s nice that your propaganda says otherwise, though.

Government is a necessary evil, but liberals focus on ‘necessary’ while conservatives focus on ‘evil.’

Sigh. All this political cant is very depressing.

I have a question for you – can you name a place where the State has failed that you would want to live?

In fact, if you made a list of places you wanted to live, they’d all be countries with Big Government – but Big Effective Government.

Acting as if “government is evil bad bad” is childish. Government is a tool of humans to achieve better, more stable lives, where individuals can flourish and progress.

Instead of trying to break your government, you should trying to make it work properly – stop wasting huge amounts on the military, which has shown extremely poor results considering that more money has been spend on the US military than any other project on Earth; prevent it from taking money from the middle classes and giving it to the ultra-rich (we’ve seen a trillion dollar+ giveaway from the Treasury to Wall St in the last year, all going to the ultra-rich); stop farming out work that used to be competently performed by the government but has gone to no-bid contractors who charge many times the original price for shoddy work.

““Even if the graph shows that the US could charge higher taxes, it would be political suicide for any lawmaker to suggest a thing. It would also hurt the economy, which is based mainly on consumer spending, to take money away from the consumer and place it in the pocket of the government.”

Of course, the government spends the money it gets. Some countries have 30% of the population working in the civil service. So, your statement is a non sequitur.”

True, but an argument can be made that the government is less able to make productive use of the money it spends. Your disagreement with the previous poster’s idea that the government somehow removes the money is of course correct. I also appreciate your discussion of political terminology. I would be a classical liberal but vote primarily for Republicans. It is too bad they do not support individual freedom and limited government to the degree I do, but they are the lesser of two evils in my mind and at this time.

The problem with the Laffer curve is that it assumes a constant tax rate for all incomes. Trabandt and Uhlig appear to be falling prey to this oversimplification. In the US, we have an extremely progressive tax rate. The bottom 20% pay a negative tax (that is, they get a tax “refund” that is more than what they paid in). The next 20% pay no tax at all, while the top 1%, pay more than the bottom 95%. Simply making the tax rate flat would allow Laffer curve effects to be seen. As it is now, the top of the economy is well to the right of the peak, everyone below the middle is at the extreme left and the upper middle is probably near the peak. The problem is that whenever taxes are raised in the US, they are raised on the upper middle and above payers. It’s far too easy for politicians to target that group, since it cannot singlehandedly vote them out of office. Unfortunately, it is also the part of the economy that employs the rest of us. When you ask where on the Laffer curve are we, you have to specify who “we” are.”

This post deserves to be read and read again. Great post AB.