By: Tom Bartlett, FBB Contributor

The Laffer Curve

I love counterintuitive ideas. They shake up the mind and cause us to examine beliefs we have not critically assessed. For example, did you know there are times when governments can lower the tax rate and receive more tax revenue as a result? Seems counter-intuitive, right? But this phenomenon was explained by economist Arthur Laffer on a napkin, as the story goes, during a lunch with US government officials. The curve he drew was very simple, as illustrated below:

Economists are still arguing about the specifics of the curve, but the basics are very easy to understand. Let’s start at the extremes:

• If the government sets the tax rate at 0%, it will generate $0 of tax revenue. This is easy to understand, as 0% of anything is 0.

• If the government sets the tax rate at 100%, it will also generate $0 of tax revenue. This may not make sense at first, but think; if you knew that everything you earned by the sweat of your brow would be snatched away by the government, would you toil at all? Probably not. In this case, the government is taxing no productivity at 100% and receiving a revenue of $0.

So, at the outer ends of the curve, at the 0% and 100% tax rates, no revenue is generated at all. But between these two extremes governments can take in revenue without killing the goose that lays all those golden eggs. And somewhere in the middle of the curve is the sweet spot where people will continue to work and pay taxes, and that is where maximum revenue is achieved.

If the rate of taxation is lowered on the left side, taxpayers will prosper more, while happily paying less tax, but the taxing body, i.e., the government will experience a reduction in revenue. That’s fairly easy to understand. But here’s where the counter-intuitive conclusion manifests; if a government’s tax rate is set anywhere above an optimum point (represented by the top of the curve), then taxpayers will resent having so much of their labour taken from them and will find ways to pay less. Either they will work less and invest less, or seek ways to pay less tax, often by some form of cheating, or find ways to move the record of their income to another jurisdiction and escape taxation altogether. Because governments are greedy wastrels, they always seek more revenue, thus they often exceed the optimum level of taxation and experience all the negative reactions listed above. In such cases it has been proven that when governments can persuade themselves to bring tax rates back toward the middle, revenue will often increase.

The Laffer Curve, Freedom, And Human Flourishing

Interestingly, the curve that Laffer drew explains more relationships than just tax rate to revenue. The curve also applies to the relationship between freedom and human flourishing. To illustrate, notice what happens if we replace “revenue” with “human flourishing” on the vertical axis and “tax rate” with “freedom” on the horizontal axis. 

Now, “Freedom” and “Flourishing” are richer and more complex terms than “tax rate” and “revenue”, because, unlike “tax rate” and “revenue”, which can each be quantified with a single number, “freedom” and “flourishing” are multi-dimensional. Many aspects of life play into them, and so it may not seem fair that the plot above flattens out the richness of freedom and human flourishing to a quantity expressed as a single number. Nevertheless, even with this simplification the general relationship holds, and you'll get the idea as we think this through, starting at the outer ends of the graph as we did before:

• At 0% freedom we do not flourish. The weight of rule upon rule upon rule, i.e., the total control of all aspects of human behaviour, is soul crushing! This is the state of total slavery. There is no flourishing here.

• At 100% freedom, where humans have no restrictions at all, we also do not flourish. This might seem a bit odd, but think; total freedom means no restrictions at all. None. No restrictions against theft, murder, or cruelty. In such a state, humans are free to exact their terrible wills against others. Examples can be piled up to show that total freedom inevitably results in chaos. My favourite example from history is known as the Murray-Hill riots. In 1969 the Montreal City Police went on strike for less than one day, and the city went mad, resulting in bank robberies, arson, looting, and death. And that was only a temporary cessation of enforcement. Imagine life with no rules whatsoever. Total freedom results in the nasty, brutish, and short life that philosopher Thomas Hobbes warned us against. With total freedom we languish. Cities would burn to the ground, and the streets would be covered with blood. Just as with the total absence of freedom, there is no flourishing in total freedom.

To repeat, humans do not flourish at either extreme of the freedom axis. But in between those two extremes some optimal condition can be found that promotes maximum human flourishing. And just like the Laffer curve, we have our own counter-intuitive conclusion: If the culture is too liberal in some respect, i.e., if the culture is on the right side of the graph, then a reduction of freedom can actually increase human flourishing.

Example Of Freedom Hurting Flourishing

If our analysis is right, we should be able to find societies that languish because of their excessive liberality. Here, helpfully, Kirk Durston recently wrote a blog post giving highlights from a re-reading of the book “Sex and Culture” by Oxford social anthropologist J.D. Unwin. Unwin was focused on the relationship between sexual freedom and cultural flourishing for various historical cultures. Durston summarizes some of Unwin’s findings below:

• Increased sexual retrictions, either pre or post-nuptial, always led to increased flourishing of a culture. Conversely, increased sexual freedom always led to the collapse of a culture three generations later.

• The most powerful combination was pre-nuptial chastity coupled with “absolute monogamy” in marriage. Cultures that retained this combination for at least three generations exceeded the accomplishments of all other cultures in every area, including literature, art, science, furniture, architecture, engineering, and agriculture.

• If total sexual freedom was embraced by a culture, that culture collapsed within three generations to the lowest state of flourishing. These cultures were usually conquered or taken over by another culture with greater social energy.

Durston’s conclusion was that “some moral laws will seem to limit human pleasure in the short term, but will prevent great suffering or maximize happiness and fulfillment in the long term.”

We have our own experiment going on in our culture, in the same realm as Unwin's analysis. With the sexual revolution that began in the 1960’s, our culture has been freed from the restrictive sexual morals of yesteryear. We have increased our freedoms! But flourishing has not come (If this does not strike you as obvious, there is data on this here and here). Our added freedoms brought about a drop in flourishing because as a culture we had moved onto the excessively-liberal side of the freedom-flourishing curve. This move served to decimate many families, and the wounds of too much freedom are raw and open. We are not flourishing, and we know it. If we want to maximize flourishing, we must walk-back some of the freedoms we have granted ourselves.

The Chains Of Human Flourishing

When you first talk with your liberally minded neighbours about the counter-intuitive idea that too much personal freedom can hurt human flourishing, they will think your conclusion is absolutely nuts. It will sound paternalistic to them. They will think you’re a puritan come to steal their pleasures and chain them to an archaic form of moral slavery. This is one reason why your neighbours often dismiss Christianity, because “Christian morality is restrictive!” and to their minds restriction is backwards.

But explain to them that, while it is true humans don’t flourish under total slavery, neither do we flourish under total freedom. Both extremes lead to death. If the goal is to maximize human flourishing, it will only be found in relation to an optimal set of restricted freedoms.

Once your neighbour agrees to this, don't be timid in saying that, yes, Christian morality is restrictive! It is designed to be so, for our good, and for the good of our children. Yes, Christian morality is restrictive, but it is restrictive in exactly the way that brings about human flourishing.

This, of course, is only the starting point of a conversation. From there you can talk about the moral argument for God or the justification of Christian ethics. You could talk about our common corrupted human nature that bucks against every authority, including the Lordship of Christ. But wherever the conversation takes you, keep it going.