Maximum Effective Taxation Rate [METR] Paradox or Refined Laffer Curve.

Laffer Curve attempt to estimate the Maximum Revenue Collection achievable through taxation rates. Laffer Curve states that there is an increase of revenue collected until an optimum point is reached.  Then the Revenue Collected begins to drop off as Taxation Rate approaches 100%. Laffer Curve also states that same revenue can be collected with different taxation rates. A decrease in Revenue Collections as the taxation rate passes an optimum point is explained through a combination of economic activity drop-off coupled with an increase in use of tax avoidance strategies.

The METR Paradox builds on Laffer Curve by introducing restrictions to economic activity caused by economic activity regulations and barriers to commerce. METR Paradox explains a relationship between restrictions to economic activities and revenue collection effects on taxation policy. Relying on Laffer Curve, the METR Paradox estimates that a Maximum Effective Taxation Rate exists somewhere around 20%, and any move from that point is a function of both Taxation and Regulatory Policy. METR Paradox emphasizes a relationship between Regulatory Environment and Revenue Collection. METR Paradox states that as Regulations and Barriers to Commerce increase the Taxation Rates must fall to collect the Maximum Amount of Revenue. METR Paradox also explains why due to economic activity regulations in any modern economy, a maximum revenue collection level will be around 20%, and is the best that can be realized. METR Paradox rationalizes why Maximum Projected Revenue under the Laffer Curve can never be achieved in a modern economy.

METR Paradox states that with any combination of Tax and Regulatory Policy in an EXPANDING Capital Market Economy, a Maximum amount of Revenue collected through Taxation is about 20%.

METR Paradox is theorized from a following observation: When a new restrictive policy is placed on an economic activity, additional Capital in the Private Sector is required to facilitate economic “workaround” caused by a new restrictive policy.

When restrictions to economic activities are lessened around the 20% Revenue Collection Point a Tax Rate can be raised. And when restrictions to economic activities are increased around the 20% Revenue Collection Point a Tax Rate must be lowered to achieve Maximum Revenue Collection.

To tie this into a real world example a chart below was created by deptofnumbers.com with data from annual US Census Statistical Abstracts highlighting the period from 1950 through 2009. The chart shows Real Revenue Collection exactly as stated by METR paradox.

Total US Tax Revenue as a Percentage of GDP

METR Paradox develops an explanation to the Hauser’s Law and provides a framework for the modern economy to achieve Revenue Collection Rates that can be greater than 20% while EXPANDING economic growth.