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Observing an extreme form of the Laffer Curve

Summary:
It’s possible for prices - and taxation is the price of government, as we know - to become so high that people simply lie, cheat and steal to avoid those prices. The price, say, of a legal heroin high is, given the illegality, effectively infinite. Thus there’s an awful lot of lying, cheating and stealing without the law going on. Stamps have become more expensive:The rising cost of postage is fuelling a market in reused stamps, allowing shoppers to buy them online for a quarter of the price.A first class stamp now costs 67p, but uncancelled ones are available for as little as 16p on sites including eBay.The Daily Telegraph discovered a booming second-hand market with eBay alone hosting more than 2,100 listings for re-used first and second class stamps.One seller told the Telegraph they

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It’s possible for prices - and taxation is the price of government, as we know - to become so high that people simply lie, cheat and steal to avoid those prices. The price, say, of a legal heroin high is, given the illegality, effectively infinite. Thus there’s an awful lot of lying, cheating and stealing without the law going on.

Stamps have become more expensive:

The rising cost of postage is fuelling a market in reused stamps, allowing shoppers to buy them online for a quarter of the price.

A first class stamp now costs 67p, but uncancelled ones are available for as little as 16p on sites including eBay.

The Daily Telegraph discovered a booming second-hand market with eBay alone hosting more than 2,100 listings for re-used first and second class stamps.

One seller told the Telegraph they sell 20,000 reused stamps a month, claiming that they had had "no issues to this day" with the stamps they sold. 

We more normally think of the Laffer Curve as being about the interplay of the income and substitution effects. That mixture leading to higher tax rates - sometimes - causing lower revenues and the inverse, lower creating higher. But at the extreme it becomes that lying and cheating which predominates.

It has been observed - not least by us - that when Russia abandoned the old Soviet taxation system and moved to a flat rate income tax of 13% then revenue collected rose substantially. When this is used as an example of the proof of the general Laffer contention the usual answer from those who don’t wish to believe is that this wasn’t about those income and substitution effects. Rather, the old system was so confiscatory that people just lied and cheated.

Well, yes, quite. That is the extreme end of the Curve. We can, obviously enough, increase the inspection of peoples’ finances, as we can monitor online markets for stamps. But at some point we’ve got to also consider the costs of those interventions to support those prices/tax rates. What, for example, would be the cost to civil liberty of cracking down sufficiently that no one could lie, cheat or steal their way around an 80% income tax rate? And yes, there are those seriously suggesting such rates.

We can even approach this in a Marxist manner - every social action produces a reaction before synthesis is reached. Would we actually like that synthesis?

Tim Worstall
Tim Worstall is a British-born writer and Senior Fellow of the Adam Smith Institute. Worstall is a regular contributor to Forbes and the Register. He has also written for the Guardian, the New York Times, PandoDaily, the Daily Telegraph blogs, the Times, and The Wall Street Journal. In 2010 his blog was listed as one of the top 100 UK political blogs by Total Politics.

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