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The Ridiculous Rahn Curve

economics, taxes

The Rahn Curve indicates two things.  The first is that there exists a single, optimal level of taxation for maximizing economic productivity.   The second is that this maximum is somewhere between 15-25% of GDP.

The first statement is true.  The second is not.

Here is the Rhan Curve:

Notice the pathetic nature of this graph. No grid, no units and no endpoints. It gives us little information but implies a lot.   It implies that GDP can only grow, not shrink.  It implies that what lies outside of the narrow (?) range covered by the graph is unimportant — nothing to see here citizen.  Let’s improve the graph a little:

Here we show that GDP could rise or fall, and some potential values for the curve near 0% and 100% taxation.

I’ve drawn three potential extensions of the Rhan curve.

If the red extension were correct, then without government (0% government spending), then the economy would collapse (presumably due to lack of police services).  On the other hand, giving government total control of the economy would lead to even more impressive GDP growth than the local maximum that was originally marked as optimal.

If the blue curve were correct, then there would not be much to complain about — just that whoever made the original graph was lazy.  One interesting thing about the blue curve is that the economy would remain the same size with either no government or total government.

Finally, if the green curve were correct, then totalitarianism would lead to economic collapse, and anarchy would lead to prosperity.

Of course, drawing lines on the graph does not tell us anything about what is true about the economy.  However, it does help indicate how poorly conceived the Rhan curve is.

In order to maximize economic productivity, there must be every incentive to produce, and little incentive not to produce.  Why do people work?  To get money.  What do taxes do?  Take away their money.  Taxes are clearly a reason to work less.  The higher tax burden is, the less productive people will be.  The lower taxes, the better.  This is not rocket science.  How low can taxes possibly go…?    Zero!

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