Friday, February 11, 2011

Baseline scenario on progressive taxes

I didn’t review the study in detail, but this is just common sense, anyway. When you have a progressive tax system and an income distribution with a much longer tail at the high end, you would expect people in the middle to be net beneficiaries of government.
Talking about the Bruce Bartlett observations on TaxNspend

When wealthy people pay taxes nearly proportional to their own wealth, then they tend to force government to increase government wealth at the same personal wealth rate. The effect is to make government and private sector obtain outcomes with equal efficiency.

There is a Laffer limit to this, certainly. The principle is entanglement: People entangle with government in proportion to their wealth/(tax rate). Laffer implies an optimal entanglement,that formula is likely his answer.

What restricts the optimum from being reached? Constitutional errors that make for a mal-proportioned match between bands of wealth and levels of government. We compute this as channel redundancy due to mismatch when piping multi-variate sequences down a restricted channel. E.G.: When government goods and private goods come with incompatible cargo containers, the trucks become inefficient.

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