JM Keynes on the Laffer Curve

Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more–and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.

That\’s how the new Adam Smith Inst report on the tax system starts out.

Well worth reading. Do look to pages 24-28, where they estimate the losses to HMRC from the 50% tax rate. £350 billion to £650 billion.

YVMV but it\’s not an unreasonable set of calculations. Certainly, to reject it, you\’ll need to do more than just \”there is no Laffer Curve\” for as Ol\’ JMK above points out, there most certainly is, it\’s just a matter of where it is not whether.

One of the delights of course is that it repudiates (and refutes, but then I would say that wouldn\’t I?) every single tax proposal Ritchie has made.

14 comments on “JM Keynes on the Laffer Curve

  1. Have they really made GDP forecasts by taking a survey of people ‘contemplating’ non-residency and directly translated that into lost output?

  2. How do imagine it works. In the 2008/2009 tax year I paid about £30,000 to the UK treasury in Income Tax and NI alone.

    At the end of 2009, I left the UK for good – “Voted with my feet” as the saying goes. Now the UK treasury gets nothing and I get a much reduced rate in a foreign jurisdiction and my spending gets done there.

    I am but one person, there are many others who are considering the same. It is not impossible, it just takes determination.

    Personally, I should have done it years ago. The deciding factor was the 50% tax rate – which at that time I was well below. My rationale being that knowing governments as I do, with a bit of inflation and a bit of fiscal drag it wouldn’t be too long.

    Don’t forget that it is those that earn the most that pay the largest proportion of the taxes. If they leave then the rest have to pay a hell of a lot more. This is not just about the bankers, but a lot of entrepreneurs as well.

    There are no real barriers to moving goods around Europe anymore and it may be cheaper and more cost effective to operate a business from Poland than the UK.

    Think about that.

  3. @John Galt
    Yes. And all so that the rent-seekers can continue to suckle on the teat.

    The ‘policy’ attempts from the economically illiterate to continue to do so are, and will be, counterproductive for their ‘own interests’.

    Let’s screw everybody who ‘has more’ so I can have what I want. You are right. They will end up with much less.

    Where the hell do they think the wealth they want to redistribute comes from? And why the hell is every wealth creator evil and need crushing?

  4. Gosh, just opened the report and it does indeed say £350bn. So not Tim’s mistake.

    I’ll need to read it in detail, but I have to say I’m deeply sceptical.

  5. Quite – I’m surprised Tim didn’t spot that one. Is this over 20 years or something?

  6. Lefties love quoting JMK when it comes to spending your way out of recession. I love reminding them that JMK was always at pains to remind everyone of the flip side: spending less money when you’re not in recession.

    Unfortunately (conveniently?) Bonkers Gordon and his fellow bunkermen never let details like that get in the way of their spending plans.

  7. Tim,

    You’re right that one cannot simply dismiss the Laffer Curve outright but it remains a valid argument that it has only ever been validated at the margins and not in the middle ground where key decisions on tax policy are made.

    That’s the crucial problem when making predictions on the impact of tax rates on revenues. We simply don’t know what the shape of the curve is in the mid range and frankly I suspect that there is no uniform shape as there are far too many variables and potential confiunding factors to take into account when trying the model the curve and nowhere enough data to make any reliable inferences.

    I suspect that Laffer’s general proposition is likely to be valid but that detailed investigations would show that the shape of the curve will vary considerably from economy to economy and from industry to industry, to the extent that the best than can be said of economists’ predictions is that, with a bit of luck, they may be slightly better than relying on astrology.

    Tim adds: Laffer Curve: this is the same thing I always say. That of course it depends upon which tax in which society at what time. 905 income tax ina war when everyone is pulling together because they support the war isdifferent from peacetime when he general feeling is that the leeches are riding high on the hog. Taxes on cigarettes can be at a higher rate than those on fancy clothes: the elasticities are different. Long term is different from short term. Taxes which are raised locally and spent locally I’m sure can be higher than those that are raised nationally (because people can both see and influence what they get for them).

    But it’s pretty safe to say that 62% income tax (which is what the current top it and ni is in the UK) is over the long term peak of the Laffer Curve according to most economists.

  8. “…to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss…”

    Actually this is used by manufacturers to kill off a loss making product line, or one nearing the end of its life. As sales diminish the price goes up to cover cost of production and discourage new customers and to discourage old ones from re-ordering.

    Increasing taxation then is a good way to discourage new investors, and drive existing investors away.

  9. The trouble with the Laffer curve is that it isn’t a theorem, it’s an axiom. The ideal point model of consumer preference to be specific. Moreover it isn’t the only one, see Green and Srinivasan ‘Conjoint analysis in Consumer Research’ 1978. If the ASI were interested in how tax-payers actually make the tax/services trade-off they’d be conducting actual conjoint analysis suverys with actual explicit methodologies rather than spouting off their usual ideological preferences.

  10. Unity: Correct. I’ll start to take notice of the Laffer curve proponents when they start putting some figures on the x and y axes backed up with empirical evidence.

  11. Just finished reading the entire document and it’s pretty fair. Not sure about the 13th century analysis on muslim taxation (I’m not kidding), but otherwise it hits the key points.

    I especially liked the analogy about taxes from the guy who brought about the French revolution – “How to pluck the goose to get the most amount of feathers with as little honking as possible” – very funny.

    I doubt that the Cobbleition will go for it though. Too many looters in that bunch, both Tory wets and Lib Dems.

    Glad I left.

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