Forbes, 20 July ’13: An economist admired by Reagan cites the principle to follow but fails to follow it to its logical conclusion: levy a tax that grows its base.

Art Laffer’s Nearly Right On Taxes But Not Quite

Excerpt:

This does not, absolutely not, mean that therefore we should never tax. There are many things that government does which is worth more than that loss of economic activity. I am absolutely certain that the two hundred dollars a year that the US government spends defending the country against the Canadian hordes is worth the loss of $60 in economic activity elsewhere. I might be less than convinced that the entirety of the $2 trillion tax burden is worth the $600 billion of activity lost but that’s a rather different point.

What that OECD chart is showing is something more subtle. That different taxes have different deadweight costs. That is, the way we tax can increase or reduce the amount of economic activity we lose as a result of raising the same amount of revenue. There’s actually a spectrum there, from lowest loss to highest. That lowest loss is actually positive, repeated taxation upon real property. Or as we generally call the idea, land value taxation. This improves the efficiency with which we use land and thus increases overall wealth. More harmful, but not very much more so, is consumption taxation: those sales taxes. More harmful again is income taxation and then most harmful of all is corporate and capital taxation.

There’s one not on the chart there, which is transactions taxation like the absurd financial transactions tax being bandied about. This has much higher deadweight costs than any of the others.