Tuesday, February 9, 2010

Taxes and Your Ideal Competition Weight

What?!? Is there going to be a new tax on weight? Possibly, but that is not what I am thinking. In reading an article in the New York Times, “Slimmer Doesn’t Always Mean Fitter”, which can be found here, I couldn’t help but notice the similarity between a persons ideal athletic competition weight and tax revenue.

It may not seem like a logical connection, but I made the corollary in thinking about the Laffer Curve. The Laffer Curve (named after and popularized by, though not created by economist Arthur Laffer) is a theoretical representation of tax revenue generated in relation to the tax rate. The idea is that at a particular tax rate revenue will be maximized. The connection I made between the two topics was in looking at the Laffer Curve graphically.

Graphically the Laffer curve is generally represented similarly:

Looking first at the lower and upper boundaries of possible tax rates, a tax rate of zero would quite obviously yield zero tax revenue. Conversely, if the tax rate is 100%, revenue too would be zero as there would be no personal financial incentive to work. The government would be taking all of your earnings. It is somewhere between the tax rates of 0% and 100% where tax revenue would be maximized. Don’t let the nice round shape of the graph fool you as it is a simple graphical representation; don’t think that a 50% tax rate would necessarily yield the highest revenue. This is just a theoretical tool.

Further, if the tax rate is low, the revenue that will be collected will be on a sizable chunk of money, but the tax authority is collecting a small percentage at the low tax rate. As the tax rate is raised there is disincentive for individuals to work as a larger portion of their earnings will go to the tax authority coffers. Fewer people will work so that while the government is taxing at a higher rate, it is taxing a lesser total amount of money. Making the model more complex would invole other factors such as the elasticity of employment, but that is beyond the scope of what I am talking about here. In brief, it asks the question "At what tax rate would you cease working?" 50%? 75%? 90%?

The connection I made is that a competitor, whether a runner, cyclist or other active athlete, has an optimal performance weight, much like there is an optimal tax rate. I put together a graph similar to the Laffer Curve here:

The bounds of this graph are a competitor weighing zero pounds (equally absurd as a zero percent tax rate in a tax collecting environment) and n pounds, n being any large number where the competitor would be considered morbidly obese (akin to a 100% tax rate). If a competitor is over their optimal performance weight, they will carry around that additional weight, slowing them down or requiring a higher level of exertion to maintain the same pace. If however the competitor were underweight, there wouldn’t be sufficient body reserves and the exertion would burn muscle protein to keep going; also sub-optimal.

There are many factors that play in to finding an optimal tax rate or competition weight, though I have to admit I never really thought about the implications of supply-side economics in relation to athletic competition.

Friday, January 1, 2010

Happy New Year

Happy New Year! While I know that this year will be a happy one, it will be a very different year for me in comparison to the last few. I will be returning to my life working on Wall Street. While I have no regrets as to how I spent the last several years in what I have accomplished, experienced and have seen, going back to Wall Street has always been the plan and one that I am 100% committed to.

I have been snowboarding up in Vermont, but this will now only be a weekend pursuit. I also have a short jaunt planned to Central America in the Spring (and yes, I will be there visiting some folks at a couple of stock exchanges), but that about wraps up my travel. There are a few things that I need to take care of in the coming weeks before putting on the suit and tie again, but this is a change I welcome. There is no substitute for the mental challenge that working in finance offers, at least not for me. I am refreshed and ready with the same level of persistence and motivation that I have used to tackle every other part of my life.

I will keep posting on my blog periodically when content of interest arises, perhaps reflections of my travel and of course from the trip to Central America.

If I were to thank everyone that I felt I should, I would be typing through the night. I have been incredibly fortunate to meet so many kind, interesting and hospitable people in my travels and have learned so much from you all. So to all of you, I say "Thank You".