Comment by AnthonyMouse
16 days ago
> It's natural that if you don't optimise for GDP then GDP will probably not be maximised.
They're not unrelated though.
Suppose that at a 30% tax rate you long-term end up with a GDP per capita of $50,000, whereas at 20% it would be $80,000. Then in the first case you get $15,000 per capita to provide healthcare and things, whereas in the second case it's $16,000.
There is a point where that stops working. If a 15% tax rate would get you a GDP per capita of $100,000, 15% of $100k isn't more than 20% of $80k. Then whether the extra GDP is worth having lower government revenue becomes a more complicated question. But if the tax rate is too high, it isn't even a trade off, the higher rate is just a net loss to everyone.
I get the idea that small fractions of bigger pies can be more than a big fraction of a small pie. And I can assure you that Scandinavians are well aware of tax revenue optimisation.
I will even say that it is very likely that they are already near the optimum for their country. The reason is simply that if every time you increase taxes and notice revenue goes down, you will naturally reverse it. Society moves through incremental changes.
> The reason is simply that if every time you increase taxes and notice revenue goes down, you will naturally reverse it.
That isn't necessarily how it works.
Suppose you increase taxes and revenue goes up by 5%, but growth goes down. Now in ten years your economy has grown by 2.5%/year instead of 3.5%/year or more, so your tax base is >10% lower than it would have been in the alternative but at no point is is less than it was the year before.
That can just be a simple extension of my argument. Instead of using at the immediate revenue you apply the optimisation rule for the long term revenue by using the difference in observed GDP growth.
3 replies →