Friday, November 30, 2007

Getting a Handle on Tax Policy

A few days ago, a Megan McArdle post got me thinking about taxes. Seems like there's a way to bound the problem:

  1. The Laffer Curve exists. Since 0% taxation yields no revenue, and 100% also yields no revenue, there's at least one optimal taxation rate.

  2. If you're to the right of the optimal rate, you should always decrease taxation, at least to the point of being optimal.

  3. If you're to the left of optimal, you need to decide if you want government to be bigger. Here you should be guided by the maxim: "Government should be as small as possible but no smaller."

Of course, none of this tells you how to structure the tax burden. I'm a fan of fairly steep progressivity, but I hate the idea of wealth redistribution. Maybe next week I'll come up with guiding principles for resolving the tension between these two ideas.

For the record, I think we're to the left of optimal, and maybe government needs to get a bit smaller, but it also needs to pay down some debt. So I will sadly bid farewell to the Bush tax cuts, all the while feeling very noble and self-sacrificing. Of course, I'll be annoyed if taxes go up and the Dems throw a party, but surely they wouldn't be so irresponsible.

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