Welcome to the Laffer Curve

One for all those who insist that the rich should pay more in taxes:

Imposing a new 45p rate of income tax on the rich will not work and will actually cost the Treasury money, an influential independent think-tank has warned.

The existence of the Laffer Curve is simply a mathematical certainty. The question is what is the maximum revenue raising rate?

Mr Browne and Mr Brewer calculate that the current 40 per cent is the optimum rate to maximise Treasury revenues from income tax on the rich. "Any attempt to go above that would cost the Revenue money," Mr Browne said.

I wouldn\’t say that I am wholly convinced that 40% is indeed that rate. But that there is one is certain and going above it will be counter productive needs to be understood.

If we\’re actually to have that vital debate on tax that some are calling for, we do need to find out what the rate is.

That would actually be a useful thing for some of those left wing economists to work on. What actually is the maximum revenue raising rate of income tax? Would be interesting, don\’t you think?

Gentlemen, start your spreadsheets……

15 comments on “Welcome to the Laffer Curve

  1. The existence of the Laffer Curve is simply a mathematical certainty.

    I don’t see how it is a ‘mathematical certainty’.

    If you mean there comes a point when raising incomes tax reduces the revenue, then that seems a near certainty. But not sure why it is a mathematical certainty?

  2. Do you think the government should maximise the amount extorted from an activity with positive externalities?

    That’s not really the point. There are lots of arguments for setting the tax rate below the Laffer peak. The only reason to set a tax rate above the Laffer max is spiteful envy politics.

  3. “I don’t see how it is a ‘mathematical certainty’.”

    If we assume, as is usual, that the revenue raised at the endpoints of 0% and 100% rates is zero, and we assume that there is a point in between where revenue is non-zero (and positive), and we assume that revenue varies sufficiently smoothly* with the rate, then the existence of a rate that maximises revenue in the interval is, indeed, a mathematical certainty. It is called Rolle’s Theorem.

    * strictly speaking, that it is continuous and differentiable

  4. My point is that the state shouldn’t be fining people for working AT ALL.

    You’re right. That’s why Zimbabwe is the perfect State.

    Idiot.

  5. I have a problem with the way everyone is looking at this Laffer Curve thingie: They seem to be using it as a guide for maximising state income.

    State income is not something to be maximised; it should be calculated as the minimum the government needs to efficiently provide those services the public demands of it.

  6. “If we assume, as is usual, that the revenue raised at the endpoints of 0% and 100% rates is zero, and we assume that there is a point in between where revenue is non-zero (and positive), and we assume that revenue varies sufficiently smoothly* with the rate, then the existence of a rate that maximises revenue in the interval is, indeed, a mathematical certainty.”

    Well quite. If we don’t assume one of those things it isn’t.

  7. Idiot in Oz,

    Zimbabwe’s problem is the government steals productive land to hand to government connected yet unproductive thieves.

    What this has to do with income tax is unknown.

    Taxing rent seeking (IP and Land-Property which derives a large part of its value being being defended by the state) is taxing an negative externality (you have a property monopoly) whereas taxing income is punishing wealth creation.

  8. AntiPitizenDrone

    Perhaps we’d all like to know how the levying of taxes based on income is theft, while taxes on land ownership are not. I’m sure there will be a long meandering by which you avoid the plain fact that every civilized society taxes income at source and every uncivilized one taxes ownership of land and materials producing a tiny elite of extremely wealthy people who own most of the land (and most of the State) and makes everyone else a peasant tenant in their own country.

    Without exception.

    Take your meds before replying – no not the aspirin, the OTHER one.

  9. I’ll say it again for the benefit of the stupid.

    Taxing Property Rights is taxing an negative externality, taxing working is just harmful to comparative advantage.

    I think it’s you that requires the medicine.

  10. Read Martin Gardner’s Essay on the Laffer Curve if you need any convincing about the ‘mathematics’ behind it…

    as for property rights versus income tax

    I’d rather be taxed for working AT ALL
    than for living AT ALL…

    Income tax has a low-end cutoff, so those who really need the money are not affected. It makes more sense than heavy property tax, which would effect everyone.

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