The Laffer Curve and Military Spending

by pjamesbeardsley

The Laffer Curve is a concept in economics and public policy in which common sense is applied to taxes with surprising (and real, as the Clinton and Bush capital gains tax cuts revealed) results.  It is the brainchild of Art Laffer, economic adviser to Presidents Ronald Reagan (officially) and Bill Clinton (unofficially).  They experienced great economic prosperity.  Art Laffer is smart.

The concept begins with a question: what if the marginal tax rate of something (be it an income tax, corporate tax, capital gains tax, etc.) was 0%?  How much revenue could a government reasonably expect from such a tax?

The answer is obvious: nothing.

But there’s another question: what if the marginal tax rate of that same thing were 100%?  How much revenue could a government reasonably expect?

The answer might be slightly less obvious, but still true: nothing.  If something is going to be taxed to the absolute maximum, nobody is going to do it.  At least not legally.  There’s no benefit to doing it legally.

Yet the government does get some revenue from these things.  So clearly, there must be some peak (or, theoretically, peaks) at which the tax rate provides a maximum amount of revenue.  It is very possible, as the capital gains tax cuts under Clinton and Bush revealed, that a lower tax rate will result in greater government revenue from such things.  Even if a higher tax rate does result in greater revenue, that doesn’t make it optimal national policy.  The government shouldn’t be trying to squeeze every last penny they can get out of the American people.

It’s not a difficult concept. Most on the right and middle of American politics, as well as some on the left, acknowledge such a thing.  What so many of those same people on the right fail to realize is that the same concept applies to military spending and America’s overseas military footprint.

Replace government revenue with national security and marginal tax rate with military spending.  If America spent nothing on the military, America could expect no security outside of disorganized mobs.  National security would be almost nothing.  If America spent all of its money on the military, national security would also be minimal.  There would be nothing to defend.  There would be nothing of real, productive value to get such money to the military.  National security would be virtually nothing.  The same concept is easily applied to the overseas footprint of the U.S. military.

So clearly then, it is possible to cut back military spending or overseas footprint and actually provide greater national security.  This is not rocket science.

Since 2001, America’s inflation adjusted, per capita Defense Department spending has gone up by approximately 50%.   Since 2001, America has engaged in long, arduous conflicts in the Middle East and Northern Africa.  Since 2001, America has been subject to more terrorist attacks (unsuccessful though they were, but only due to explosive malfunctions, not security measures) than in the 50 years prior.  Anti-American, Islamic Fundamentalist Nationalism has been on the rise throughout the Middle East and parts of Europe.

Which has to make you wonder: are we already operating to the right of the peak?  Even if we’re not, is the national security policy of the United States really optimal?