Ah, Polly….

Labour should simply announce an emergency cap on top pay. Anything over the prime minister\’s £200,000 should be temporarily taxed at 90%. No bonuses, no fiddles. The golden geese will fly away to Dubai, Mumbai, Shanghai? Unlikely, but if a few go, who cares?

Well, it depends upon how many do go.

The money should be hypothecated for an emergency national job-creation plan

For if any significant portion do go then there won\’t be any extra money.

That\’s leaving aside the Laffer Curve effects of such taxation on future efforts. Tax rates of 90% do indeed depress economic activity and thus the tax that can be raised from such.

Not at all: near-bust UBS cut top pay but finds other banks picking off their top people. That\’s why government has to call time on pay for all, to end the greed game where every silverback demands to be in the top quartile.

But such top people are indeed in an international market. They can bugger off very easily indeed.

As an aside, worth noting that these punishing tax rates are coming in just above Polly\’s gossiped about salary level….but well below those of her bosses at The Guardian and the GMG.

"Hey Boss, you should pay 90% tax but I shouldn\’t" will make for interesting water cooler talk.

This does very much amuse me though.

But "Eat the Bankers" signs do not portend a spit-roasting in Canary Wharf:

I don\’t think that Polly knows what "spit roasting" means in today\’s parlance.

At least I hope not.

32 comments on “Ah, Polly….

  1. There was a very good article in the WSJ about the 90% punitive tax rates for US bankers:

    http://online.wsj.com/article/SB123776600113009243.html

    Not only is it unfair (to appropriate that word from New Labour), it’s also utterly counterproductive and stupid on a tactical level. Read the article and see what a man facing 90% tax does: take an unpaid sabbatical once he hits the threshold, because it’s better to swan around doing nothing than work for nothing. So much for Polly’s jutjawed hero getting any money for jobs.

  2. I’m surprised you cite the Laffer curve as a predictor of the future economic effects of a punative top rate tax. It’s been fairly well debunked by economists who aren’t out on the fringes of the right with pro-Reagan neo-cons.

  3. “I’m surprised you cite the Laffer curve as a predictor of the future economic effects of a punative top rate tax.”

    I just posted an example of the Laffer curve in action. But I’m not surprised that you think the Laffer curve has been “fairly well” debunked since you can’t even spell punitive, let alone grasp what the word means.

  4. “It’s been fairly well debunked by economists who aren’t out on the fringes of the right with pro-Reagan neo-cons.”

    The laffer curve is a self evident truth. It does not rely on any complex modelling. To undestand it, you just have to imagine what you would truly do given various incentives. You will work harder for 60% of x than for 10% of x. To say anyone has debunked the laffer curve is to say someone has debunked the notion that people will work harder for a greater return than for a lesser return. A truly astonishing claim and anyone making such a claim is a loon.

  5. But that’s not self-evident. If you are taking home 6 pounds an hour, rather than 1, then you might work fewer hours if you get to the income level you want.

  6. Sorry Matt, I really don’t see how the above affects things. Whether you want to work fewer hours or more hours does not affect the fact that people work harder for a greater return than for a lesser return.

  7. How about a 90% rate on Minister’s earnings above 60K and all MP’s allowances?
    It might help them feel the pain.

  8. I don’t understand your point then. The laffer curve idea is that a higher tax raises a lower revenue. You say this is self-evident because people work harder if taxes are lower. But not in terms of hours, so I guess you mean ‘intensity’. Yet why would this offset the higher tax rate (it might but it’s not self-evident)? Further it seems to imply that a company can always increase productivity by raising pay.

  9. “I don’t understand your point then. The laffer curve idea is that a higher tax raises a lower revenue. ”
    Not exactly. It is that ABOVE a certain threshold – that varies from tax to tax and over different timescales – revenues raised will begin to decrease. Going from 10 to 20% would no dount see an increase, going from 40 to 90 will defintely cause a decrease.

    “You say this is self-evident because people work harder if taxes are lower. ”

    No I said people work harder for greater returns than for lesser returns. Don’t paraphrase me then attack your paraphrasing as if they were my words.

    “Further it seems to imply that a company can always increase productivity by raising pay.”
    No it implies no such thing.

    The laffer curve comes about because we know that at 0%, a tax will raise no revenue. We also know that at 100% virtually nothing will be raised too because no one but the insane would work for no return at all. Therefore the two ends are fixed at zero revenue raised. The bit in between can’t be negative, and isn’t zero, leaving a curve. The shape will vary from tax to tax for sure, but of necessity, it exists.

  10. Think about this, Matt: If the tax rate is 0% the revenue is zero. If the tax rate is 100% the revenue is zero. (Who will work for nothing?) Thus, there is a tax rate that produces the maximum revenue somewhere between 0% and 100%. What this value is depends on many factors, but empirical evidence puts it between 30% and 50%.

  11. Of course feel free to postulate a different shape for the shape of the line that connects 0% and 100%. I suspect you will not come up with one.

  12. “But that’s not self-evident. If you are taking home 6 pounds an hour, rather than 1, then you might work fewer hours if you get to the income level you want.”

    Fred and Bert may indeed differ from each other in how much they want to work. BUT, we are not interested in comparing Fred with Bert. We are interested in comparing Fred at x% Tax with Fred at y% Tax and likewise for Bert. For both Fred and Bert, it holds true that both of them will work harder for a greater return than for a lesser return. The person is not that variable under analysis here, the tax rate is, therefore we hold all other variables constant.

    Tim adds: Well, hateful though it is to defend Matthew (errr, a joke Matthew) he does have a point. There are indeed studies of piece workers like taxi drivers that show that (at least some people) work until they’ve got a certain amount of money. The day’s necessities say. And if they reach it early, they stop work. If they reach it late, they keep going until they get it.

    There’re two technical names for the effects we see here, both of which I’m too bored to go and look up right now. But we do have the effect that some people (or all people to some extent perhaps) target a level of earnings and keep going till they get there. We also have the effect that a tax reduces the incentive to work and increases the incentive to consume leisure.

    Which effect overcomes the other is an empirical question. And I’m certainly in no doubt that at the higher tax levels the disincentive effect takes over. Thus tax rates above a certain level (as is pointed out above, which tax rates and when varies) will reduce the tax collected.

  13. As it relates to the few golden geese flying away, anyone with similar (or more in-depth) stats to London, Frankfurt or other financial centres:

    But late last week Mayor Bloomberg was channelling these columns when he said that raising taxes on high earners could drive them from the city. “One percent of the households that file in this city pay something like 50% of the taxes,” explained the Mayor. “In the city, that’s something like 40,000 people. If a handful left, any raise would make it revenue neutral. The question is what’s fair. If 1% are paying 50% of the taxes, you want to make it even more?”

    http://online.wsj.com/article/SB123500384765617949.html

  14. Tim adds: Well, hateful though it is to defend Matthew (errr, a joke Matthew) he does have a point. There are indeed studies of piece workers like taxi drivers that show that (at least some people) work until they’ve got a certain amount of money. The day’s necessities say. And if they reach it early, they stop work. If they reach it late, they keep going until they get it.

    Not at all hateful Tim, we should all aim to defend the truth even if it pains us. My point to Matt however, was not that he was wrong, but that his point did not actually rebut mine (well in fairness yours, but a point I agree with). Eg If you had claimed that 2+2=4, and Matt had claimed “No it doesn’t because Friday comes after Thursday” I would make the same point. I am not claiming that Friday does not in fact follow Thursday, I am claiming that Friday followng Thursday does not affect the fact that 2+2=4.

  15. After t’war was there not super tax – you kept sixpence out of every pound you earned over a certain level – I seem to remember.
    How did that work out?

  16. “are indeed studies of piece workers like taxi drivers that show that (at least some people) work until they’ve got a certain amount of money. The day’s necessities say. And if they reach it early, they stop work. If they reach it late, they keep going until they get it. ”

    Surely each individual has their own laffer curve. Ie, for each person, there is a tax revenue raising maximum rate, above which, that person will begin to reduce their work. (I bet the treasury would do anything to be able to predict the best rate on a per person basis!) . For people such as you describe above, their laffer maximum may be more skewed towards the 100% rate than for most people, but even for them, their behaviour will follow a laffer curve; ie even they will do NO work if the rate is 100%.

  17. ” There are indeed studies of piece workers like taxi drivers that show that (at least some people) work until they’ve got a certain amount of money. The day’s necessities say. ”

    This strikes me as a very good way for governments to operate ;-). They can work at collecting tax till they can cover defence, and justice, then take the rest of the year off.

  18. We do not need to discuss the merits of Toynbee’s argument, for there are none; she is a witless cretin.

    Under the assumptions that the total tax take as a function of tax rate is continuous and differentiable, and that at the end points of 0% and 100% rate revenue is equal (perhaps zero), the Laffer curve is a restatement of Rolle’s Theorem, which in turn is a special case of the Mean Value Theorem. If we assume those two points, then the existence of the Laffer curve is not a matter of debate. There exists an extremum of revenue in the interval [0,100]%.

    It is debatable whether the assumptions hold (especially the continuity/differentiability aspect) but the existence of the Laffer curve itself is apodictically true given those assumptions.

    As for the broader point, the substitution of leisure for labour has two countervailing forces at work as wage rates rise. On the one hand, as wage rates rise, a worker can substitute labour for leisure and thus increase his income as the marginal value of an hour of labour vs. an hour of leisure has increased (an equivalent is people working overtime). On the other hand, to maintain his income he has to work fewer hours and can thus substitute leisure for labour (this is a general trend).

  19. I earn more than 200 and use the excess for luxuries such as holidays, as well as extra investment for my family. I can assure you that as I am self-employed I would simply take Fridays off rather than work for thieves running the government.

  20. anyway what gives a government the right to tell me how hard I can work and how much I can earn? Forget the Laffer curve, just explain the logic?

  21. Chris, i think you’re getting a bit het up.

    When you say “people work harder for greater returns than for lesser returns”, this is something I agree with – it is one of the key planks of a the case for a minium wage.

    But in the discussion here, which is on taxes, I thought “people work harder if taxes are lower” was a fair paraphrase, as clearly it is a shortened version of “people work harder if taxes are lower (because their returns are higher)”.

    But if not then I apologise for the ‘attack’.

    I have then to say that I think you are taking part in a different debate than other people, which is about the Laffer curve. Your original point, which was “To say anyone has debunked the laffer curve is to say someone has debunked the notion that people will work harder for a greater return than for a lesser return.”

    I have two objections to this statement (and the attack on loons that followed). First, if it is true, it only produces a Laffer Curve effect if the decline in work exceeds the rise in the tax rate. Which is not self-evident, which is why presumably even LC supporters believe it has an upwards sloping bit. Second, is it true, for the points Tim and David have mentioned, and obviously historically the evidence (as David points out) is not in your favour as working hours have declined despite greater returns.

  22. Would it not be better to have an LVT and no- income tax and thus let people decide how much tax they want to pay, by letting them decide where they want to live?

  23. Yeah, a couple of beers last night Matt, sorry if I came across as het up. That said I was keeping the debate honest. You put things in quotes that are actually your paraphrasing. I am always a bit suspicious when someone needs to paraphrase something in order to disagree with it. I suspect they want to sneak in some difference in the paraphrased version.

    “But in the discussion here, which is on taxes, I thought “people work harder if taxes are lower” was a fair paraphrase, as clearly it is a shortened version of “people work harder if taxes are lower (because their returns are higher)”.”

    Therein lies the problem. It may well be a shortened version of “people work harder if taxes are lower (because their returns are higher)”. But seeing as I never used that phrase you have shown that you used a fair paraphrasing of a phrase I never used.

    I refer you to ZT and David’s explanations too as to why it exists and MUST exist. Your points are interesting, but have little bearing on the existance of the Laffer Curve. One end is fixed at zero as a mathematical certainty (0% of anything = 0 Tax rasied). The other end is nearly zero as an emprical certainty (people don’t work for nowt). Again, I challenge you to come up with an alternative graph to the beautifully drawn one below.

    | |
    | |
    | |
    | _______ |
    | / \ |
    | / \ |
    | / \ |
    | / \ |
    | / \ |
    |/ \|
    _____________________
    0% 100%

    A picture tells a thousand words. Please describe a alternative shape to the revenue raising power of a tax to the one above.

    “First, if it is true, it only produces a Laffer Curve effect if the decline in work exceeds the rise in the tax rate. Which is not self-evident,”

    It jolly well is self evident that some people will work if they get to keep 50% of what they make, and no one will work if they get to keep 0% of what they make.

    ” which is why presumably even LC supporters believe it has an upwards sloping bit. ”
    LC supporters beleive it has an upwards sloping bit for similar reasons that sine wave supporters believe it has an upwards sloping bit.

    “Second, is it true, for the points Tim and David have mentioned, and obviously historically the evidence (as David points out) is not in your favour as working hours have declined despite greater returns.’

    Sorry, I may be being dense here, but I really don’t see how these factors affect the existance of an LC. They may contribute to it having a weird shape rather than a perfect curve, but the two ends will always be 0% and the bit in the middle will always raise towards some tax raising maximum that is not at 100% tax rate.

  24. See if this works…

    | |
    | |
    | |
    | _______ |
    | / \ |
    | / \ |
    | / \ |
    | / \ |
    | / \ |
    |/ \|
    _____________________
    0% 100%

  25. I think I’d leave it at that.

    If we’re just saying that a tax rate of 100% would raise no revenue (I’m not sure what this would mean in practice though, if you say care for someone who is ill it’s not possible to remove all of that through taxation, is it?) and 0% would also raise no revenue (seems fair) and we’re talking about income taxes only, then it’s not really a major issue. But if that’s all that people mean by the Laffer Curve, then it is mistitled, such a finding must have been obvious since money was first invented.

    Tim adds: Well, yes Matthew, but you’d be surprised by how many people dismiss the Laffer Curve as being wrong in some manner. When in fact, as you point out, it’s a very simple piece of obviously true logic.

    The interesting thing, once you’ve accepted the basic logic, is what are the inflection points? And those will differ from society to society and much more importantly, dependent upon what the tax is upon. Dependent upon the elasticities for example.

    A weaker version of he argument is that we must look at tax rises and tax cuts in a dynamic manner rather than a static one. Ie, take account of how a tax change will alter people’s behaviour. So called “Laffer Effects” rather than hte Laffer Curve itself.

  26. Well Matthew, I don’t know how it got its name. Perhaps someone called Laffer first articulated it, in which case, it isn’t really mis titled. The guy is entitled to his bit of immortaility.

    It is indeed obvious isn’t it; and yet amazingly otherwise reasonably intelligent people do seem to think that to raise more revenue all the government need do is “simply raise taxes”. When actually the Laffer curve makes clear that the maxium revenue a tax can raise is not 100%. (Lawson in fact saw an increase in revenue when he dropped the top rate from a punitive 60% to a slightly more reasonable 40%). Nevermind the morality of it, more importantly it just will not work; the government does NOT have infinite tax raising powers.

    BTW, I wouldn’t be so scathing of people who point out the obvious; the people that rule us could clearly do with the obvious being pointed out to them on all sorts of issues.

  27. The effect that Laffer pointed to has been known for a long time. One of the 18th century economists mentioned it, though I can’t remember which one.

    It’s important to note that the existence of a definitive curve is questionable -really its a hypothetical entity. When a tax rate is changed that has many secondary effects on economic behaviour. So, when it’s changed again the shape of the curve is not the same as it was at the start or at the time of the first change. (The same is true of supply and demand of a good, to some extent).

    The argument doesn’t work as Art Laffer thought it did. The basic principle he exposed though is sound.

Leave a Reply

Name and email are required. Your email address will not be published.