Laffer vs. Poisson

Laffer (on the left) versus Poisson (on the right)
 

I’m still thinking about the current controversy on where the “hump” in the Laffer curve should be placed.

Maybe it’s time to do a little “thinking outside the box.”  What if the Laffer curve is not the proper representation for the economic situation we wish to model?

If you check out Wikipedia, you see that the Laffer curve is presented as a parabola, typically skewed to the right so that the peak in the curve is after the midpoint. Why is that? Why should the Laffer curve be based on a geometric shape?

Maybe it’s because a parabola implies a scientific basis.  We use a parabola to approximate the path of a fly ball in baseball.  It is based on scientific phenomena (drag and gravity) and allows us to predict where the ball will be at any given time if we know the velocity of the ball when it leaves the bat.

Does that sound like something that should be applied to economics?  Wouldn’t a statistical tool be better?

The Poisson distribution (see image above on the right) deserves a closer look.  It is meant to model the probability of actions, not to predict a specific action.  Furthermore, in contrast to the Laffer curve, it provides a better model of behavior near the 100% tax rate.  The Laffer parabola shows the tax collected will be zero, whereas the Poisson distribution has it tapering down toward zero.  It indicates that even though nobody should want to pay all their income in taxes, some idiot will do it.  That is a better model of reality.

And that’s important!  We should be using tools that represent actual data.  The model should reflect our reality, not a vision of what we want our reality to be.

The acceptance of the Laffer curve in our culture is based on the idea that the hump in the curve is skewed toward the right.  That implies higher tax rates will generate increasing tax revenue, even at tax rates over 50%.  The Poisson distribution skews the curve the other way.  It implies that if you set tax rates too high, you will see diminishing returns.

Do you see why the Poisson distribution is not being applied in our current political environment?

If our cultural narrative is to promote more federal government activity in our lives, then we need to be shown how greater government is good for us and makes us feel better.  One way to do that is to emphasize that increased taxes don’t hurt.

If the Poisson distribution shows the opposite, our culture will make sure it never sees the light of day.

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Trouble with The Curve

 

Tim Groseclose has a video posted at Prager University postulating a relationship between tax rates and revenue.  It’s relevant to Hauser’s Law, which shows the relationship between tax revenue and income.

What’s an economic discussion doing on the Anti-Republican Culture site?  It’s all about testing our beliefs.

Mitt Romney makes a pledge to keep government spending constrained at 20% of GDP.  That’s in line with what is shown by Mr. Hauser.  If government can’t extract more than 20% in tax revenue, don’t spend more than 20%.

That’s the spending side.  On the income side, Mr. Romney wants to make permanent 20% cuts in marginal tax rates.  That assumes tax revenue increases with lower tax rates.  Mr. Romney believes America is to the right of the hump in the Laffer curve.

And that’s where there is controversy.  Where is that Laffer curve “hump?”  If it’s in the 33% area, Mr. Romney is right.  If it’s in the 50% area, the Democratic Party is correct.

How do we find out?  I guess we try to “tax the rich” and watch human nature come into play.

Can “the rich” avail themselves of more tax-avoidance schemes than the rest of us?  I imagine so, and this makes them more sensitive to the Laffer curve.  When increases in tax rates cause their net income to decline, they adopt the necessary tax-avoidance strategies.  Regular working people might not be able to stop working, but “the rich” will move their wealth into tax-free securities.

What’s the effect?  The Laffer curve will exhibit “dynamism.”  The hump moves left or right depending on tax policy, and – this is immutable – increasing overall tax rates moves the relative position of the hump to the left.

That may take an understanding of the mathematics of derivatives, but just realize that the slope of the curve begins at a peak value of one, and decreases from there.  Where the curve peaks with a slope of zero – the “hump” – is a function of our response to overall tax policy.

The Laffer curve is simply modeling human behavior.  It shows that if we get to keep more of what we earn, we keep doing what we’re doing.  If we get to keep less of what we earn, our sense of fairness causes us to look for alternative behaviors.

Tim Groseclose has a way of making the argument in a non-threatening way, but it is devastating.

The Obama Campaign preaches that it can get us free stuff and all we have to do is “tax the rich.”

At the risk of being less sensitive than Mr. Groseclose, let me pose this question:

What kind of masochist wants to re-elect president Obama just to see him proved wrong?
 

UPDATE 9/24/2012:
My wife and I went to see the Clint Eastwood film that is the title of this post.  It's a sweet movie, in the tradition of Gran Torino (with less bloodshed).  And who doesn't like baseball?

I don't mean to give economics a bad name, but when you've got the National Bureau of Economic Research showing the hump in the Laffer curve always at a tax rate of 60% or greater, and Mr. Groseclose saying it is closer to 33%, shouldn't someone in academia be interested in resolving that discrepancy?

What about Mr. Hauser?  If Americans historically balk at giving up more than 20% of GDP in federal taxes, shouldn't that appear as a discontinuity or inflection point on the Laffer curve?

Remember, "The Curve" is meant to model economic behavior, not to be an ironclad law.  Have we gotten things turned around?

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The Mask Slips

Thanks to Allen J. Schaben of the Los Angeles Times for this photo and to Zombie for the context.

Pat Caddell, a prominent Democratic Party pollster, showcases America’s current national security policy in an interesting way.  He notes the disparate treatment between the protections afforded Chris Stevens in Libya and Valerie Jarrett in Martha’s Vineyard.

According to Ben Shapiro at Breitbart.com, Libyan Ambassador Stevens did not have a Marine detail in Benghazi, Libya, but White House Senior Advisor Valerie Jarrett received a full Secret Service detail while on vacation at Martha’s Vineyard.  Foreign Service officers function without the armed protection of our government, while Democratic Party senior operatives receive the elite protection of our Secret Service.

What’s wrong with this picture?  Not a thing, if you understand the power and authority of the Democratic Party.  Americans are pawns, and our culture is engaged in splitting us into “good guys” and “bad guys.”  A few examples:

--The “Freedom of Expression” Grouping

Andres Serrano’s Immersion (Piss Christ) is celebrated in our culture.  So is The Holy Virgin Mary by Chris Ofili.  In contrast, the work of the gentleman shown above in the midnight “perp walk” is not being celebrated.  Our culture lets us know that art denigrating “The Religious Right” is good; works that embarrass the Democratic Party are bad.

--The “Equal Protection under the Law” Categorization

Members of the New Black Panther Party are granted exemption from our laws along with major Democratic Party contributors.  Unfortunately, Sheldon Adelson (a contributor to Republican political candidates) is now subject to IRS and NLRB investigations, and the Koch brothers, (supporters of Republican causes) suffer incessant verbal abuse.  Our federal agencies are  being used to reward allegiance to the Democratic Party and to punish Republicans.

--The “Promote the General Welfare” Classification

The contrast between the security detail for Valerie Jarrett and the safety of those who serve in the Foreign Service is a case of political emphasis.  A similar situation occurred at the Democratic National Convention earlier this month when the American military was honored. The backdrop for the presentation was a graphic of Russian warships and Turkish jet fighters.

The DNC ended up giving our military a token observation of service to country with an emphasis on the generic nature of their work.  If the United States Military were a Democratic Party identity group (e.g. young single women, people with dark skin tone, people with Hispanic ethnicity), proper recognition might have been afforded.  It is disappointing that our military is a DNC afterthought.

The three Constitutional ideals listed above are an abstraction to many people.  They are protections that we expect in America, but we don’t feel the need to “man the barricades” just because the Rule of Law is under assault or our First Amendment rights are losing protection.  Instead, we hear a single direct message delivered to us day in and day out:

Americans have a choice.  We can get free stuff – free healthcare, free education, and free birth control – or we can have bad people (Republicans) put in charge.

That is what our culture puts forward as the choice for Americans.  It is a coordinated election message, and its simplicity gives it power.

But if you look carefully, the mask is slipping.

UPDATE 9/27/2012:
Courtesy of Matt Drudge, we have evidence that the "free stuff" message is working.

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Self-Doubt

Clint Eastwood at the 2012 Republican National Convention - Stan Honda, AFP/Getty Images
 

Is “self-doubt” good for you?

Use the Internet to search for the term and you are directed to sites that give advice on how to conquer, break, or cure self-doubt.  Evidently it is bad if you have too much of it.

But is the absence of self-doubt a good thing?  It is an attribute of authoritarianism, and can lead to problems.  A few examples from our current politics:

--The United States Senate has not passed a budget in three years.  The feeling is, “You people don’t need no stinkin’ budget!  We’ll spend your money any way we like.”

--Public Schools don’t like being adjudicated.  “We don’t need no standardized testing!  We will teach students any way we like.”

The righteous absence of self-doubt is a power trip, but it’s also destructive.

DWI automobile accidents are a case in point.  A person who has no concern for his or her driving ability while inebriated is exhibiting the absence of self-doubt.  Senator Ted Kennedy’s experience at Chappaquiddick is emblematic.

A person who is texting while driving is also displaying the absence of self-doubt.  But must we criminalize the behavior?  Do you catch the irony in lawmakers who have no self-doubt in passing anti-texting legislation?  Their lack of self-doubt enables them to criminalize the behavior of citizens who exhibit the absence of self-doubt!

The “60 Minutes” coverage of last year’s mission to kill or capture Osama bin Laden provides another look at self-doubt.  The author of “No Easy Day” noted how the women on site at the bin Laden compound were unusually combative, aggressive and hostile.

He didn’t relate this behavior to the absence of self-doubt, but it was a factor.  The people at the compound had absolute confidence in their ideology.  They lacked self-doubt - and it worked to their detriment.

So, if too much self-doubt is bad, and too little is no better, what are we to do?

A line from the Clint Eastwood movie “Magnum Force” comes to mind:

“A man’s got to know his limitations.”

That advice helps us understand the proper amount of self-doubt.

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