The Yin and Yang are two ancient concepts of Taoism (a Chinese philosophical tradition) more popularly known through the symbol that represents them than for what they actually imply.
If the name does not sound familiar, perhaps this image does:
Although the symbol depicts them together (which also has an explanation, as we will see later), Yin and Yang are essentially two distinct concepts. The first is related to the earth, darkness, and passivity; it is associated with femininity. The second is linked to the sky, light, and activity; it is associated with masculinity.
Yin and Yang, however, have a greater philosophical and conceptual impact in what they represent together rather than individually. Taoism, in fact, explains that these two “forces” do not exist independently, but coexist in harmony. They are two aspects of a whole.
This synergy leads us to perhaps the most important meaning they symbolize: balance.
Like almost every aspect of everyday life, Yin and Yang represent the dialogue and balance between: cold and heat, summer and winter, good and evil, and countless other ordinary examples.
As it could not be otherwise, this millenary concept also applies to taxes (which, incidentally, are also a millenary institution).
“The Tax Yin and Yang”
The next question, perhaps with a bit of skepticism, is: what is the relationship between Yin and Yang and taxation?
Although at first glance they may seem like unrelated worlds, Yin and Yang are notions that can also be applied to the world of taxation.
If we stop to think about the term “tax” and its traditional connotation, taxes are nothing more than “impositions” of conditions that make transactions more burdensome (or, colloquially: more expensive), in pursuit of a common pool of public revenue. Thus, the value-added tax makes consumption more expensive; income tax makes the generation of profits more costly; property tax makes the right of ownership more expensive. In short, taxes make the economic dynamics of markets more costly.
Now, we know that taxes are essential resources for the State to – in theory – have the tools necessary to fulfill its constitutional purposes: healthcare, education, justice, and so on.
Thus, the central point of all this is: what is the equilibrium point between the tax rate and the State’s need to collect revenue in order to fulfill its purposes?
Welcome to the “Tax Yin and Yang”: the Laffer Curve.
Arthur Laffer is an American economist who worked as an advisor to President Ronald Reagan’s administration between 1981 and 1989.
Among other valuable ideas, Laffer is globally recognized for proposing the notion that there exists a tax rate capable of maximizing government revenue. An optimal tax equilibrium point. The tension between the price of taxation and the objective of revenue collection. This concept later became known as the “Laffer Curve”.
The key idea is that increasing tax rates, perhaps counterintuitively, does not always lead to higher tax revenues (or greater fiscal efficiency). On the contrary, beyond a certain level, revenue collection may decline, and further increases may become counterproductive to the intended objective.
The explanation behind Laffer’s conclusions is based on the following premise: a lower tax burden encourages the economic activity in question (consumption, business investment, or acquisition of assets). This leads to an expansion of the universe of taxable transactions (or revenue-generating activities). In other words, it creates an incentive for formal economic activity.
The practical application of the Laffer Curve varies according to the economic characteristics of each country. For example, the equilibrium tax rate in an economy like Brazil will not be the same as that of Uruguay. Nevertheless, the concept is a valuable framework when implementing public policies aimed at economic growth.
In the case of Paraguay, a landlocked and developing country eager for progress, experience has shown that competitive tax rates relative to the rest of the region have increased foreign direct investment, expanded the economy, and boosted government revenue.
What remains pending is the discussion about the efficiency of public spending.
Meanwhile, the path forward is to keep in mind the ancient principle of Yin and Yang, and to continue striving for tax balance.
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