28 October 2011

The Laughter Curve

- the ability to laugh all the way to the Swiss Bank

The Laughter (Laffer) curve theoretically shows the relationship between government revenue raised by taxation and the taxation rate.

From the left, government tax revenues increase as the tax rate increases, but at a declining rate. It becomes more worthwhile hiring a accountant to avoid or evade paying tax. Beyond a certain point tax revenues fall as money pours into off-shore accounts. Capital flies out the country, reducing both investment and output, and inducing a further decline in tax revenues.  It falls to zero revenue at a 100% tax rate. There is some dispute over what this means. Has the individual moved to Switzerland, died, become street trader or is bartering?

One can reduce the number of tax cheats and fraudulent claims, by legalizing them.  It's not too difficult to imagine a country's tax system becoming unfairer (more regressive) and, at the same time, reducing the number of cheats (and vice versa).

The Curve was popular with Ronald Reagan who bent it to justify lower tax rates for high incomes in the US in the 1980s. From 1979 more than 40 countries cut their top rates of personal income tax.

This is what happened in the US:

and what motives the Wall Street protests. 


Now the problem with Greek austerity measures and structural reforms is all that money that has gone outside the country. Greek assets, including properties, will become even cheaper and capital will flow back in (hailed as a success) to buy them back up. Citizens, the poor, the ex-middle-classes, will be worse off (hailed a success. Well done Greece, more competitive, fly the flag, bright future etc). The result will be an increase in inequality and a re-vamped oligarchy energized by financial occupiers who would then slip away quietly. 

“To see what is in front of one’s nose needs a constant struggle.” (George Orwell). But injustice lingers with a rotting smell.

Back to the bunker

I forgot to mention the 27th October historic deal of day? Here why: ('of two minds': full post here via Zerohedge)

'EU Leaders Throw Europe a Plutonium Life Preserver
The euro system was doomed from inception for fundamental reasons; trying to conjure up "something for nothing" solutions will fail catastrophically, and soon.
As Europe flails helplessly in the waves of insolvency, its leadership has tossed it a life preserver. Too bad it's plutonium, and will take Europe straight to the bottom. Plutonium is of course one of the most toxic materials on the planet, and the "rescue" cooked up by the EU leadership is the financial equivalent of plutonium.
Stripped of propaganda .... "rescue" boils down to this: something for nothing .... in two ways:
1. The financial alchemist's favorite magic: leverage.....suddenly backstop 1 trillion euros of banking-sector losses, all with illusory money.
2. "Guarantees" to cover the first 20% of loan losses.... presented as the equivalent of 100% guarantees, because it is inconceivable that losses could exceed 20%. .... 80% of every bond is somehow "safer" because the first 20% will be paid by EU taxpayers.
..... "something for nothing" magic will turn lead into gold. Abracadabra....oh well, close; it's heavy, it's metallic--oops, it's plutonium.' (of two minds blog -Charles Hugh Smith)

Or a "haircut for the banks that will in reality just be a convoluted way to get citizens to pay get it without even realizing it" (Zerohedge). Compare the above deal with a 11-year-old boy's suggested solution to Greek debt crisis (here).

At least Archimedes knew what to do with leverages. He also invented another device for raising liquidity, but it seems the screw has a different meaning in Europe.

This is the point in the following video where G. Papandreou returns back from work.

'of two minds' goes on to describe the Euro model (add German taxpayers and workers don't win as well) as:

....... understanding the increasingly unstable dynamics of the EU is the post-colonial "plantation" model 

1. Low cost labor and low-value materials flow from the periphery (colonies) to the Empire (center), which then ships high-value, high-profit finished goods back to the colonies.
2. The colonies must buy the high-value finished goods on credit that is issued and controlled by the Imperial center.

....The euro cemented this co-dependency: ..... once the euro raised the cost of production in the periphery nations, then of course nobody could beat Germany's cost advantages. The euro actually lowered Germany's cost of production in terms of foreign exchange rates while raising the costs in periphery nations that were previously able to lower their cost of production via currency devaluations.

Having surrendered that mechanism to access the deep credit markets of the center, then they had no choice but to buy the high-margin finished goods from Germany, as nobody else could make the same goods for the low German price.

These booming high-profit German exports of finished goods to the European periphery generated vast surpluses of capital that were then loaned to the periphery to enable their further purchases of German goods

It's the classic mercantilist-consumer co-dependency on a gigantic scale, with low-cost credit fueling both increased consumption and production. ....... let's ask: how many German goods would have been imported by the EU periphery if those nations had been forced to pay cash for everything from the start? Precious little is the answer; the cash--in the form of actual surpluses available to spend on imports--would have run out immediately after the euro was launched.

In other words, the debt orgy enabled not just carefree consumption, it also enabled vast German exports to the Eurozone. Now we start seeing how the once-mutually beneficial co-dependency has become toxic: now that the periphery's debtors have become debt-serfs, German exports to the periphery are contracting.

When it all implodes, German exports to the periphery will be a shadow of their past glory, and the surpluses which enabled the leveraged orgy of credit will dwindle

Sovereign currencies are the only mechanism for discounting differences in credit worthiness and production costs. The euro was established as the currency equivalent of gold, holding the same value in every member country. But the mercantilist/quasi-colonial model requires credit to flow from the center to the periphery, and that is precisely what has happened in the EU.

In the colonial model, the colonists are indebted and poor. The net value of their labor flows to the Imperial center as interest payments, and the banks at the center set the cost of money and the terms--naturally.  (Full post at: of two minds blog -Charles Hugh Smith)

Germans are also ripped off, since their working poor will either produce trade surpluses or being made unemployed, and then there is eventual tax bill for the entire Euro mess.

"Prime Minister Papandreou said 'let's hope a new and better dawn emerges".  Dusk is more likely, as without economic growth, darkness descends on those unable to pay their lighting bills.  Greeks (for those who can find work) will be working for the good of WHAT country/institution/organisation at or near subsistence levels. It is hoped that the Greek sovereign debt will be reduce to 120% by the year 2020. The structural reforms is supposedly an ambitious plan, making the Greek economy more competitive and sending out the right signals.  So, students can relax. Don't rush your exams as you won't be needed until 2020.  An ambitious deal with the right incentives and signals, indeed.


Its now Oxi day. The day celebrates the Greek rejection of the ultimatum made by Mussolini on October 28, 1940 to be occupied or be invaded. The invasion led to a defeat of Mussolini's army. Swedish band Sabaton (excuse the metallic blood) shows the mythical status. Merkels' remarks, on the eve of this celebration, about refusing to accept the Euro deal would end the peace in Europe was unfortunate timing (Merkel wants 'permanent' supervision of Greece, warns of war).


  1. Explained perfectly:


  2. What if there are no aliens?

    So there is no need to worry.