Laffer Drift¶
One dark and fearsome crag, half-lost among the Himalayan mountain range of uncleared obligations stretched out before this blog, is a promise to devote a post (or several) to Mencius Moldbug’s Neocameral regime model. The opportunity to make a small payment against this debt having arisen, I am eagerly seizing it.
A relatively marginal but consistent feature in Moldbug’s model is the tendency of Neocameral tax rates to approximate to the Laffer maximum. Since Moldbug aims to rationalize the theory of government, under the presumption of its ineliminably self-interested nature, this suggestion scarcely requires an argument (and in fact does not receive one). Government will always tend to maximize its resources, and Arthur Laffer’s graph of optimum revenue-raising tax rates seems to show the way this is done. A Neocameral regime tends the economy of a country exactly as a farmer tends a herd of animals — without ever forgetting that ultimate redemption occurs in the abattoir.
There is a problem with this assumption, however, which is that the very idea of a Laffer maximum tax rate is incomplete. By coordinating tax rates (on the x-axis) with tax revenues (on the y-axis), the Laffer curve demolishes the crude economic intuition that revenue rises continuously with tax rates. Through the a priori postulate that a 100% tax rate yields zero revenue, Laffer demonstrates that revenue maximization has to be located somewhere in the central region of the curve. Its exact location — as determined by the shape of the curve — is dependent upon empirical factors, such as incentive effects, and cannot be deduced by pure theory.
Missing from the Laffer curve is time, and thus dynamic revenue projection. This is especially important to the Neocameral model, since a central failure to be rectified through reactionary democracy-suppression is the systematic heightening of time-preference, or collapsing economic time-horizons, with which democracy is inextricably bound. The Neocameral state is justified by its capacity for time-extended economic rationality, and this is not something that the simple Laffer curve can reflect.
Adding time to Laffer graphs is not a complex task. All that is required is a multiplication of curves, constituting a time series, with each curve corresponding to a time-horizon. Rather than a single curve, such a graph would consist of a 1-year curve, a 2-year curve, a 3-year curve … and out to whichever extended prospect was considered appropriate.
If levels of taxation were irrelevant to economic growth rates, then each curve would be identical, and this exercise would lack all significance. If, alternatively, taxation effected growth in a predictable direction, then the Laffer curves would steadily drift as time-horizons were expanded.
To begin with the improbable case, assume that extraction of resources from private property owners tends to increase economic growth. Then each successive Laffer curve would drift to the right, as the tax base expands under the beneficent impact of lavish government spending. A small and efficient government, by depriving the economy of its attention, would steadily shrink the tax base relative to its potential, and thus reduce the total level of takings (as a function of time).
If, far more plausibly, taxation suppresses growth, then each successive curve will drift to the left. The Laffer maximum tax rate for a 1-year time horizon will be revealed as ever more excessive as the horizon is dilated, and the shortfall of the depredated economy is exposed with increasing clarity. The more extended the time-horizon, the further to the left the dynamic Laffer maximum has to be. As economic far-sightedness stretches out into the distance, an authoritarian-realist regime converges with anarcho-capitalism, since growth-maximization increasingly dominates its revenue projections.
Of all the reasons to distrust the Neocameral model, an intrinsic tendency to short-term Laffer-max revenue raising cannot be among them.
[Apologies for the link famine — trawling the Moldbug archive through the GFC is a nightmare undertaking, and it’s 3:30 in the morning. I’ll try to punch some in over the next few days.]