Ritchie responds to the criticism of his assumption that a 60% rise in average tax rates will have no impact upon behaviour.
Here\’s the comment I left there:
So, what you\’re saying, in formal terms, is that moving the average tax rate up by 60% (from 34% to 55% as you describe it at one point) will have no effect upon the following equation:
C = w (T – l)
Which is an extremely brave assumption to make and one that would require, before it being accepted as true, a certain amount of empirical research. You are, in effect, stating that no one would subsitute leisure for market income with such a tax change and that everyone has a fixed desired income which they will work to fulfil.
Yet you do seem to miss the logical implication of that latter part. If it is true that we all have some fixed income that we work to fulfil (or that this top decile do) then your tax changes will increase tax revenue over and above static changes. For as post tax incomes will be lower people will work more to get to their desired post tax income.
And as you\’ve not included such a tax rise as a result of your impression of the income effect we have to conclude that you don\’t actually believe this point either.
But as to the major point. Don\’t you think it might be a good idea to base our estimates of the revenue to be had from tax changes on the empirical research of the past couple of centuries rather than the societal impressions of a retired accountant?