2006/09/24 - José Carlos Rodríguez - Libertad Digital

Esperanza Aguirre and Taxation

In his own words, the first time he developed the idea was on a paper napkin.Arthur Laffer laid out a simple curve, an inverted "U", showing that as tax rates rise revenue to the State does too. When the rates reach a certain height, however, revenue growth slows. With even higher rates the State begins to lose revenue, unable to steal more wealth from society.

The reason is simple and was explained much earlier by Ludwig von Mises: "The idea of the total tax cannot be thought out to its ultimate logical consequences," because "if the entrepreneurs and capitalists do not derive any personal benefit or damage from their utilization of the means of production, they become indifferent with regard to the choice between various modes of conduct" and "become disinterested irresponsible administrators of public property." In short, they do everything except produce and make the best use of capital. And without production there is nothing to tax. One hundred percent of nothing is the same a zero percent of everything. This is why there is a section of the Laffer curve where it is possible to cut taxes, increasing the incentive for workers and businessmen to produce, and also increase revenue.

Esperanza Aguirre knows this well and is confident in her recent announcement, fulfilling a campaign promise, to lower the region's income tax rate one percentage point. Incentives for public administrators are different from those that assure efficient use of financial resources. Families, businesses and individuals, on the other hand, are careful to make the most of their own money. Cutting taxes is proof Madrid's regional governor has confidence in society.

Madrileños are fortunate to have a governor who believes in society's initiative. They are just as lucky that Ms. Aguirre can even undertake such measures. Fiscal federalism, which is nothing more than making regional administrations responsible for taxation as they already are for spending, offers a bit of relief for long-suffering taxpayers. It allows each territorial government to compete to provide the best fiscal conditions to its citizens, the businesses where they work and which meet their needs. Fiscal competition among administrations, like among companies, works. Look how Catalonia copied Madrid, eliminating the estate tax after Esperanza Aguirre made the decision to end this tax, which John Stuart Mill viewed as especially unjust.