Monarchy, Democracy, and the Laffer Curve
Jude Wanniski, may he rest in peace, when he was alive, spent his time sending “memos” to politicians and federal bureaucrats advising them on a variety of policies. His most famous supplication was that the policy-makers use the Laffer curve to determine the “optimal” tax rates, optimal meaning that which would bring in the most revenue. It just so happened, in Wanniski’s opinion, that marginal tax rates were too high even from the point of view of the rulers themselves, and lowering them would increase tax revenue. This was supposed to happen because with lower federal taxes the economy would grow faster due to the greater incentives to work and invest and generate more taxable income. This caused us libertarians to look at him with some favor. Now Rothbard had some unkind words to say about this scheme (Ten Great Economic Myths, Myth #9; A Walk on The Supply Side), but I want to apply Hoppe’s insights to this matter.
Hoppe first sets up the right endpoint of our curve: “Where nothing has been produced, nothing can be expropriated, and where everything has been expropriated, all future production will come to a shrieking halt.” Then he considers the incentives to the state if it is monarchical: “Hence a private owner of government (a king) would avoid taxing his subjects so heavily as to reduce his future earning potential to the extent that the present value of his estate (his kingdom) would actually fall, for instance. Instead, to preserve or even enhance the value of his personal property, he would systematically restrain himself in his taxing policies, for the lower the degree of taxation, the more productive the subject population will be, and the more productive the population, the higher the value of the ruler’s parasitic expropriation monopoly will be.” (Democracy: The God That Failed, 19) It is apparent that Wanniski’s memos might have succeeded, had he been tutoring a prince. In a democracy, however, things are very different. “A democratic ruler can use the government apparatus to his advantage, but he does not own it. … He owns the current use of government resources, but not their capital value. In distinct contrast to a king, a president will want to maximize not total government wealth (capital values and current income) but current income (regardless and at the expense of capital values). … Accordingly, it must be regarded as unavoidable that public-government ownership results in continual capital consumption. Instead of maintaining or even enhancing the value of the government estate, as a king would do, a president (the government’s temporary caretaker and trustee) will use as much of the government resources as quickly as possible, for what he does not consume now, he may never be able to consume. In particular, a president (as distinct from a king) has no interest in not ruining his country. … For a president… moderation offers only disadvantages” (24)