There is a relationship between taxing and government never discussed in the controlled press; that which is large enough to fall under the purview of the elected ruling class and excite the body politic. Nonetheless, there is an optimum tax rate, but it is never discussed in spite of the fact it was known in antiquity. The first historical reference was in the Old Testament:
“Genesis 47:24 And shall it come to pass in the increase, that ye shall give the fifth part unto Pharaoh, and four parts shall be your own for seed of the field, and for your own, and for them of your households and for your little ones.”
That this great truth lay dormant tells us about the people who lead us, direct us, tax us, write our laws, keep the peace, send our sons to kill their enemies and guard the realm. All return from war damaged.
This principle is one of the great secrets, and like so many, it is amazingly simple. It was rediscovered in the Dark Ages when Europe was a laboratory of social and economic ideas where it was known as “The King’s Fifth.”
It had become obvious that duchies taxing more than 20% were rife with corruption, while those taking less were too weak to maintain or defend themselves. In the millennium between Rome and the Renaissance Europe was a laboratory for many things forging the tools of The Age of Reason. We are at a focal point today:
In 1976 President Ford invited a number of economists and editor/authors to the White House for a luncheon meeting on the economy. As fortune would have it, Wall Street Journal Editor Jude Wanniski sat next to Dr. Arthur Laffer of USC and they discussed taxes. Dr. Laffer explained his concept to Wanniski who was writing his book “The Way the World Works.” Laffer had no paper on which to illustrate his concept so he drew a graph on a napkin. Wanniski used the figure in his book writing of it as he understood it. That napkin is as much a document as anything important done by the hand of man.
The figure is curious several ways: Laffer put “Taxes” on the vertical, “X” axis and revenues on the horizontal, “Y” axis, then showed a peak at 50%, but in their discussion did not explain why the peak, optimum, was 50%. In his discussion of the concept Wanniski does not question the 50% tax rate. Laffer was much applauded for his concept by the elected ruling class.
In “The Way the World Works,” Jude Wanniski blamed the collapse of the equities markets in 1929 on the Smoot-Hawley trade tariff legislation which did not seem possible as international trade was only three percent of our economy then instead of the 25% it is today. To resolve this we consulted The Statistical Abstracts of the United States from 1776 to 1987 seeking our historical optimum. The data produced this outcome and projection.
We had 211 data sheets, one for each point, after translation to a common base to produce data points where “100” would be the highest revenue relative to tax rate achieved during our then 210 year history and it clearly was 18.3% for all taxes collected. The dots are data points and the curve is a statistical mean through said points. It could be expressed as a single equation, but no greater truth would lie therein as such expressions are crude approximations of reality.
A 47-year study of Federal spending and revenues done by the American Association for the Advancement of Science found we had 20% tax rates in our best years. Their analyses only go back only to 1960 as their grant was only $1 million. Ours was done before computer data on this was available and is now on 211 data sheets plus a similar number of scratch pages in a thick, cumbersome binder, data gathered in three days and worked with for a week. (The AAAS study graph is available as a “pdf” file.) The AAAS study clearly demonstrates in years Congress spends over 20% of the Gross Domestic Product, GDP, federal revenues decline within a year as the economy reacts and it appears not matter whether they tax or borrow the funds, which is contra-Keynesian! When Congress cuts spending to 20% the GDP rise and general welfare rise, as do federal revenues. We would all have more, including Congress, when taxed optimally. Math analysis says the optimum point is 18.3%, quite close to the figure of antiquity and the King’s Fifth! If scholars in antiquity and those in Medieval Europe could find an ideal taxing ratio why do governments ignore truth? The answer is avarice and power. Dr. Laffer knew the ruling class would prefer higher taxes so he never corrected his chart even though data dictates. Political power is the reason and he went to the dark side, in my opinion.
At the 18.3% level of taxation the economy operated with its greatest degree of efficiency, but the power of government was small compared to what it is when the tax rates are higher. That is the problem and the reason this is not published or taught.
On seeing this we were struck with how clever Dr. Laffer had been. He incorporated the distracting profile of a woman’s breast by switching axes and he validated a tax rate where political power would be maximized 300% over what it would be if the people were honestly taxed by their government.
Whether or not the late Jude Wanniski saw through the Laffer deception is a question never to be answered, but he did cover over the corruption of the banks using depositor’s money speculatively, plus 100% margin thereby doubling the risk! We can only wonder whether or not, and from where, Jude got a big, fat bonus for that trick! His book is popular to this day, but the hypothesis Smoot-Hawley caused the Great Depression is false, but it is the religion of Wall Street. Much the same game has been played by the Obama Administration with Bernanke Bucks from “Quantitative Easing.”
Ironically, we have Republican ex-Senator Phil Graham, Ph.D. Economics, to thank for the recession of the Glass-Steagal Act that put an end to these games in 1930 only to have Wall Street invent “Credit Default Swaps” to fleece the people and destroy the economy so the folks with money can buy great assets for pennies on the Dollar after their crash while good men weep in ruin rather than enjoy the optimum tax rate.