The Laffer Curve
The concept of tax incentives is widely used in economic theory, political economy, finance, and various specific economic disciplines. One of the key concepts of this aspect is the Laffer curve – this is a graph of the dependence of the volume of government revenues on the average level of tax rates in the state (Rubin, 2019). It is a pattern proving that revenues to the budget with an increase in the tax rate occur only up to a certain critical level of tax rates and then begin to decline due to a drop in business activity due to a decrease in incentives for entrepreneurship. In other words, high taxes suppress private initiative and undermine the desire for new investment.
The idea of the existence of a certain optimal level of the tax burden originally arose in the United States in the form of the concept of the Laffer curve. However, later, this idea was used mainly as one of the elements of more general economic and mathematical models. In particular, the works of J. Buchanan, G. Monissen, and others lie in this vein (Bordo & Levy, 2021). At present, representatives of economic science are quite critical of Laffer’s concept, emphasizing excessive theorizing and denial of the possibility of conducting correct applied calculations.
Nevertheless, such ideas have generated a large field of research activity aimed at finding dependencies in taxation and benefits. It is worth noting here the analysis of the shadow structure of the economy, the quantitative indicators of which affect the replenishment of the budget and have a corresponding correlation with the tax rate (Abuamria, 2019).
However, with a larger implementation of such a number of variables, it is problematic to conduct a truly accurate qualitative analysis within these theories due to the significantly different specifics of each individual business industry. In the case of the shadow economy, this method is viable for a number of reasons: in order to objectively assess the situation and assess the risk of an increase in the shadow economy in the country, it is necessary to take into account the total tax burden in % of GDP, since the percentage of tax rates is not characterized by high volatility. As a result of the reverse effect between these indicators, the difference will be the part of the turnover that has passed into the shadow economy. Accordingly, the application of the Laffert curve is necessary for the key foundations of understanding the principle of the tax rate and state regulation. It can be actively used in highly specialized studies and the phenomenon of the shadow economy.
Contemporary Proposals and Arguments
Within the framework of the current discussion of tax reform, a unique situation has developed. Tax cuts are a fairly recent precedent when Donald Trump was in power in the US. In 2019, after its introduction in 2017-2018, the economic consequences of a $1.5 trillion tax cut became apparent: having worked in the short term, the reform could complicate the situation in the long term (Bird-Pollan, 2019).
The reduction in the tax burden provided additional impetus to the already strong recovery of the US economy, and GDP growth exceeded 3% in 2018. However, this did not force the Federal Reserve to change its long-term growth forecast of -1.8%. Business promises to increase capital investment have not been fully realized, and this is largely due to the trade war that Trump started by raising import duties on aluminum and steel, as well as on goods from China.
In addition, companies, as in 2005 when then-President George W. Bush gave them the opportunity to return foreign profits to the country at reduced tax rates in the hope of increasing investment, spent significant amounts to buy back their shares (Michel, 2017). Meanwhile, the growing budget deficit further widened as a result of tax reform and increased government spending, which could cause serious damage to the economy in the long run. Many experts emphasized the instability of such a fiscal policy: import restrictions and rate cuts are mutually exclusive measures.
However, this approach in the modern world, which has changed significantly since 2019 after the pandemic and the aggravated geopolitical situation in Eastern Europe, has several strengths. Firstly, with a complex methodology, it is possible to equalize the taxation of the income of the super-rich and the poor since there is now a rather serious gap (Durán-Cabré et al., 2019).
Secondly, the regulation of macroeconomic indicators, breaking records, requires, among other things, an increase in investment in the country and government bonds, which is precisely achieved through fiscal policy. Finally, the positive effect achieved through the Trump reform can be improved by creating more favorable conditions for imports and exports, which were limited along with the same reform.
Politics of Tax Cut Discussions
Producers in the United States, in terms of the correlation between the calculated Laffer points on the curve, are quite strongly dependent on the state budget; accordingly, any dynamics in fiscal policy are noticeably reflected in both of these aspects. This sensitivity rule also works in the opposite direction – any tax breaks stimulate the efficiency of production.
At the same time, it should be noted that there is a rather weak trend towards an increase in the manufacturer’s fiscal tolerance. In other words, the high dependence on the dynamics of change has destroyed the general direction of low tax pressure in the long term since the last century (Dyreng et al., 2020). The US government has been balancing at the level of the allowable tax burden since the early to mid-2000s, respectively; the current changes are already after the top point of the Laffer curve parabola and, therefore, are of a more stringent fiscal regime.
In the analysis, this fact is manifested in the following. First, the specificity of the United States has always been in the close correlation of fiscal and technological factors with the elasticity of labor – convex down, but capital – up (Okunogbe & Pouliquen, 2022). The simultaneous positive position of these indicators kept the tax burden at a relatively low level, but the current trend and position of the pioneers of technological developments in adaptive fiscal policy no longer seem obvious to the US.
Secondly, as a result, a high social orientation of production appeared against the background of the scientific and technological progress of the economy, which, in general, indicates a positive development. At the same time, such a social orientation was especially favorable against the backdrop of a loose tax policy towards ordinary citizens, so the current shifts in the direction other than Trump’s actions carry corresponding risks, especially against the backdrop of a crisis in other macroeconomic indicators, such as inflation.
Judeo-Christian Analysis
Regarding the Judeo-Christian analysis of the current tax reform, there are three main aspects that form this comparison. The first of these is the sharing of burdens between the rich and the poor: this is what Matthew says in his gospel in plain words (English Standard Version Bible, 2001, Matthew 23:4). The system of income taxation should be built according to the abilities and talents of each person, respectively, the richer and more powerful should pay more, as many economists and theologians have repeatedly agreed (Cutler, 2019).
On the one hand, the rich are not directly responsible for the acts that the poor do in their poverty, but they are certainly responsible for the series of events that led to this outcome, in large part because strong economists are often determinants of the political activity of the state (Cutler, 2019). Although income tax opponents often refer to Saint Mark’s quote, “Unto him that hath shall be given, unto him that hath not, even that which he hath shall be taken from him” (English Standard Version Bible, 2001, Mark 4:25), for the most part, not only the secular interpretation of Bible politicians but also theological grounds emphasize tithes as a mutual pursuit of welfare.
The second aspect is the moral or spiritual value of money, which is clearly shown in the story of how the widow, among other offerings, made her two mites. Thanks to the understanding of this point, such a characteristic of the fiscal system as a luxury tax appeared – progressive taxation of non-essential items (Cutler, 2019).
Finally, there is a third aspect, partly at odds with modern politics and contributing indirectly to the gap between rich and poor: aversion to accumulation. Christ always teaches to give everything to gain eternal life (English Standard Version Bible, 2001, Matthew 19:21). However, in matters of progressive taxation, this aspect is again a call for increased attention to the incomes of the rich, although the success of such enterprises is doubtful due to the many mechanisms and connections that the rich have in contrast to the poor.
References
Abuamria, F. (2019). The effect of deterrence factors on discourage shadow economy level and tax evasion. International Journal of Academic Research in Accounting, Finance and Management Sciences, 9(1), 62-67. Web.
Bird-Pollan, J. (2019). Revising the Tax Law: The TCJA and Its Place in the History of Tax Reform. Ohio NUL Reviews, 45, 501.
Bordo, M. D., & Levy, M. D. (2021). Do enlarged fiscal deficits cause inflation? The historical record. Economic Affairs, 41(1), 59-83. Web.
Cutler, J. (2019). The Religious Roots of the Progressive Income Tax in America. Catholic University Law Review, 68, 473. Web.
Durán-Cabré, J. M., Esteller Moré, A., Mas-Montserrat, M., & Salvadori, L. (2019). The tax gap as a public management instrument: application to wealth taxes. Applied Economic Analysis, 27(81), 207-225. Web.
Dyreng, S., Gaertner, F. B., Hoopes, J. L., & Vernon, M. (2020). The effect of US tax reform on the tax burdens of US domestic and multinational corporations. SSRN. Web.
English Standard Version Bible. (2001). ESV Online. Web.
Michel, A. N. (2017). The US Tax System Unfairly Burdens US Business. Heritage Foundation Backgrounder, (3217).
Okunogbe, O., & Pouliquen, V. (2022). Technology, taxation, and corruption: evidence from the introduction of electronic tax filing. American Economic Journal: Economic Policy, 14(1), 341-72. Web.
Rubin, I. S. (2019). The politics of public budgeting: Getting and spending, borrowing and balancing. CQ Press.