Tax hikes often decrease total tax revenue over the long run
Discussion
Yeah. But I don't think we are near the peak of the Laffer Curve, right now.
I’d have to see a breakdown of where the revenue is generated. I believe that either 2021 or 2022 was the biggest revenue year of all time, in part due to all the capital gains. With the money printer off, even increased tax rates might only produce a comparable amount of income instead of a greater amount, and I could see it becoming very quickly destructive to economic activity especially as we enter the next crisis.
The system violation is when the total debt grows faster than GDP in nominal terms.
That’s where USA is after COVID.
Debt is growing at $1.4 trillion per year (the deficit).
GDP is $26 trillion.
$1.4 trillion / $26 trillion = 0.0538
Which means US GDP now has to grow at 5.4% CAGR in order for the US government to avoid hyperinflating the USD under current tax and spending levels.
If you think a sustainable GDP growth rate is 3% then that’s a maximum sustainable deficit of… $26T x 0.03 = $780bn.
Now the Congressional Budget Office is predicting the opposite, they’re saying the deficit is set to double to $2.8 trillion within a decade as population ages.
Structurally the US is racing into a brick wall. It has been for a long time but only in terms of rates. We are now in the era of the national debt nominally outrunning GDP.
The window to recover from this is probably tiny.
I think the mistake is just assuming these variables will all hold constant. Market and political incentives will change over time. And there's going to be serious pain that will come from the necessary adjustments that will be forced on the system.