If you have read the previous article on “How to get your way with Statistics” you must have surely learned some new tricks to bend math in your favour. In this article we will learn about more such shenanigans and how to see right through them.
(Note: No prior knowledge is required to understand the contents of the following paragraphs. In any case, click on this link to read the first part of How to get your way with statistics:
Tactic 1: Abusing linearity (Lines and Curves)
Every now and then we notice the government giving out tax rebates or relief to companies if they fulfill certain criteria or increasing tax rates to bump up revenue earned. But the opposition always seems to beagainst whatever the government tries to do. This is not only because it is the opposition’s job to do so but also because the result on revenue earned can’t always be positive or even predictable.
Carefully look at this extremely scientific diagram.
This is how we tend to think taxes and revenue work. Increasingtaxes, increases revenue. It does make sense but only on the surface.
The actual relation between Tax Revenue looks something like this:-
This is known as the “Laffer Curve”.
On the left end of the graph the government charges no tax at all resulting in no revenue. However on the other end the government is cleaning up every dime that people earn because taxes are 100%. If every single penny earned goes to the government, why would anyone bother working?
Therefore whether to increase or decrease tax rates depends on where we are! Are we on the left side of the graph where increasing tax rates increases revenues or on the right side where the opposite is true?
However it is a herculean task to determine where exactly we are oreven to conclude whether reaching the top of the graph is the goal.
Reducing tax rates could motivate people to work harder and result in higher long term benefits or it could result in government slacking leading
to poor infrastructure and low productivity of businesses ultimately affecting revenue.
Considering the possibility of the higher class offshoring their economic activity in case of higher rates and similar innumerable intricacies of an economy it is really hard to tell what decision ultimately results in the best outcomes and for whom.
Therefore a Tax-Revenue curve could look anything like this:-
Ultimately what the politicians do is:
It could be the case that reducing taxes results in more revenue.
Iwant it to be the case that reducing taxes results in more revenue. Therefore it is the case that reducing taxes results in morerevenue.
The best thing about the laffer curve is the fact that it not only applies to economics or statistics but even in our personal lives. It subtly teaches us to think in a “non-linear” fashion.
Staying on an excessively rigid diet does of course yield the best results but can you really sustain it for a long time?
Or are you actually sustaining an immensely flexible diet that won’t get you those washboard abs even if you keep it up for years?
The key to know what decision to take depends on a simple mantra.
Which way you should go depends on where you are
What do you think about the laffer curve and linearity? Let us know in the comments section and stay tuned for more math stuff!
Note: The concept explained here is simplified from the book “How not to be wrong” by Jordan Ellenberg