The Last Laffer

This here is the Laffer Curve. It depicts the relationship between the rate of taxes and government revenue. According to the L-curve, the government wouldn’t earn any revenue at 0% taxes, which is obvious. But it also states that at 100% taxes there wouldn’t be any revenue either, because then there would essentially be no incentive for people to earn money.

Mo Motor Vehicles

The level of taxes on motor vehicles had far exceeded the optimum level signified by the peak of the diagram displayed above. Therefore, theoretically, cutting taxes should stimulate imports and thereby increase revenue. The government has reduced their taxation of motor vehicles with this in mind. However it remains to be seen whether they will decide if the current level of taxes is, in fact, the optimum level of taxes as presented by the Laffer curve. They might jiggle the amounts up and down a bit in the future to get closer to that optimum level, but this presents a fair bit of practical difficulties i am told.

Needs and Wants

The government needs the money to balance out the budget deficit and they need the tax reforms to simplify our tax system. Both are requirements of the IMF for the release of the 3rd tranche of bailout money. I don’t know if these are a part of an overall change in philosophy oriented towards a free market economy, but a part of me hopes so. Problem is, we can probably expect higher inflation to hit us soon. And the dearth of good roads and too many vehicles will probably soon result in more of the dreaded T word on a daily basis. Which will mean we will burn more fuel. Which will mean that demand for fuel will rise, which will mean that the government could easily raise the price of petrol again.

I’m probably just a bit miffed ‘cos i can’t buy a good car going cheap. Im saddled with one right now and know that it’s market value will probably drop. The less money i can get for my existing car, the more fresh cash i’ll need for a new one. There are winners and losers in this game and i seem to have come out in the middle.

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3 comments
  1. Chavie said:

    I head that there’s some ulterior motive to the reduction in taxes. And what’s the point in reducing vehicle prices when the common man is suffering with high commodity prices? The increase in cars and A/Cs will mean we’ll use up more energy, which would mean more oil imports, which would mean a higher trade deficit. 😐

  2. Me-shak said:

    Totally agree to what chavie said. But they say they have increased the tax rates of bicycles. Wonder why? Very hard to understand what the guys are trying to do.

    Cheers!

  3. Whacko said:

    Well yeah, but they might simply increase taxes on petrol as a response. Considering petrol’s elasticity, that’d mean even more revenue. As for bikes, i think that was a one off thing on just one model. The UNP was making a hue and cry about it and it was subsequently taken off i was told. Anyway, taxes bikes haven’t really been reduced much.

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