Overview: The Bell Curve and the Laffer Curve
The Critical Importance Of The Bell Curve
Most people are average.
That’s statistical truth.
They are between one standard deviation from the mean. Also statistically, more than half the people are below average.
While it’s a disaster to engineer a society to make them “equal” — you also ignore them at your peril. There’s a lot of them. And someone will listen. Like Lenin.
Lenin leads to Marx. Marxism is terrible prescription for the flaws of capitalism, but it is a wonderful diagnosis of the biggest problem: left unchecked, all the capital ends up in the hands of very few. (If you don’t agree, check out our series on Hong Kong, a city being rocked in large part because five families control the economy)
A society where most people are working class rather than middle class is a stunted society that will not reach its full growth potential. Healthy economies need a big middle class with purchasing power.
That’s why we must take some from the rich and give to the poor. It’s not charity or decency or “social justice.” It’s economics. Just as important, it prevents oligopolies and conglomerates that choke innovation.
This is where best practices are crucial. The Soviet Union, Venezuela and Pol Pot’s Cambodia are just a few of the myriad examples of how bad redistribution is utterly catastrophic. But, Britain from 1945 to 1979 is an example of how the decline can be less bloody but just as debilitating. That leads to the redistribution problem.
The Redistribution Problem
“A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing.”
This very prescient quote has been attributed to several people. It is a deadly accurate explanation of the kind of bad government spending that now plagues the economies of the West.
Very few taxpayers contribute the vast majority of government revenues. This is how breaks down in the United States.
Adjusted Gross Income is what the U.S. government taxes on after some basic deductions like pension contributions and cost of health care.
The first thing that should jump out: the top one percent of taxpayers contribute almost 40 percent of revenue; the top ten percent of taxpayers contribute 70 percent. Next: the bottom 50 percent pay just three percent of taxes.
The top ten percent of taxpayers are the geese that lay the golden eggs. We can’t kill them.
So, when we redistribute, we must keep the following in mind:
What one person receives without working for, another person must work for without receiving.
The government cannot give to anybody anything that the government does not first take from somebody else.
When half of the people think they do not have to work because the other half is going to take care of them — and when the other half thinks it does no good to work, because somebody else is going to get what they worked for — that is the death of any economy.
The Laffer Curve
That brings us to the Laffer Curve - which guides how much government can redistribute. The Laffer curve shows the relationship between tax rates and revenues collected.
As tax rates rise from zero percent, revenues go up, until a tipping point is reached, after which increases in rates bring decreases in revenues.
Why does this happen?
Put simply, how hard would you work if the government took everything you made?
Or if it took 75 percent, how many risky investments would you make with the 25 percent you get to keep? (Whole Foods and Apple are just two examples of very risky bets that paid off)
Most people do enough to survive — and little else.
The policy question: what is the tipping point? For political reasons, neither left nor right is very interested in figuring it out. My experience in Ontario and British Columbia is a combined tax rate from city, provincial, federal governments of 40 percent on the top earners is where you start to see significantly curtailed economic activity.
This is the starting point for our exploration here. Anyone who has empirical evidence for a different conclusion is genuinely most welcome to help us.
How do we know our redistribution efforts are succeeding?
One useful indicator is a Gini co-efficient. The Gini co-efficient measures the distribution of income across income percentiles in a population, from zero to one. The higher the number, the more income inequality.
Practice shows the goal is a Gini co-efficient between .28 and .38. I suspect the right outcome for East Asian societies with their large populations is to look more like the U.S. and Japan than Canada or Norway, which have vast natural resources and few people.
That said, Germany is an outlier. The reasons go beyond the scope of this, though we will examine Germany in some detail later. But it takes a lot of social cohesion and cooperation to run a society the German way. Scaling-up for and getting crushed in two wars also plays a part.
In our other sections, starting with Economy, we’ll talk about where government should invest the money it redistributes.