In which Ritchie proves the Laffer Curve

This set of facts from the Murphmeister is just too good not to have another go at.

Key USTax Facts

  • 15,753: The number of households in 1961 with $1 million in taxable income (adjusted for inflation).
  • 361,000: The number of households in 2011 estimated to have $1 million in taxable income.
  • 43.1: Percent of total reported income that Americans earning $1 million paid in taxes in 1961 (adjusted for 2011 dollars)
  • 23.1: Percent of total reported income that Americans earning $1 million are likely to pay in taxes in 2011, estimated from latest IRS data.
  • 47.4: Percent of profits corporations paid in taxes in 1961.
  • 11.1: Percent of profits corporations paid in taxes in 2011.

OK, so let\’s have a little walk through some tax statistics.

Total tax revenues in 1961 were $159 billion. If we upgrade this for inflation (just as they have done for the $1 million earners, by the CPI) total tax revenues would be $1,160 billion in 2010.

However, total tax revenues in 2010 were in fact $4,201 billion. And if taxes had remained flat as a percentage of GDP the 1961 number would be $4,280 in 2010. That\’s close enough to being the same when we\’re talking about government money.

So what is the contention of the Laffer Curve? That at some levels of taxation, reducing the rate of tax will lead to sufficient economic growth to increase the amount of revenue collected.

And we expect this to have a greater long term effect than a short term one.

OK. So what do we have before us? We (err, they) are collecting the same percentage of overall economic activity as tax revenues. They have massively lowered rates, both average and marginal. There has been huge economic growth and the actual tax revenues are several times higher than they would have been without that growth.

Now no, I do not say that proves that the Laffer Curve is true at all tax rates for everyone all the time….in the sense that all tax cuts pay for themselves. However, the facts that Ritchie has presented to us are at least consistent with having moved from, in 1961, the wrong side of the Laffer Curve. Rates cut, economic growth up, revenues rise.

And I think we should thank Ritchie for bringing this to our attention. It\’s interesting, isn\’t it?

Which leads to an even more interesting question. Are we still on the wrong side of the Laffer Curve? My feeling in my water is that, in the long term, yes we are.

7 comments on “In which Ritchie proves the Laffer Curve

  1. There are two kinds of ‘wrong side’

    a) Are we in the UK on ‘the wrong side’ in terms of ‘would revenues increase if rates went down?’ Possibly yes, we must be so near the top as makes no difference.

    Further, our problem is not just the average rate of income tax (about 52% once you include NIC and VAT) but the fact that some sources are taxed at 70% or 80% and other sources at 0% – 20% – it would be far better to tax everything at the same flat rate. To raise the same revenues, the flat rate would be considerably lower than 52% (maybe 40%?).

    b) Even if you are at the revenue maximising rate (short, medium or long term) of income tax, this still means that the economy as a whole is running thirty or forty per cent below its potential. Even if income tax were only ten per cent, the econpmy would still be running at (say) five per cent below its potential.

    The only tax which does not depress economic activity is of course Land Value Tax, if you want to maximise economic growth AND have buoyant tax revenues, that’s the one to go for.

    But as we know, Richard Murphy is a Home-Owner-Ist so he’s ruled that one out.

  2. Great point, Tim. Thanks to Richard for the stats!

    Someone tell Mark Wadsworth about Winston Churchill’s definintion of a fanatic.

  3. “The only tax which does not depress economic activity is of course Land Value Tax, if you want to maximise economic growth AND have buoyant tax revenues, that’s the one to go for.”

    Really? Surely it depends on the rate at which it is levied, no? A 100% tax on the rise in value of “unimproved” might have some pretty dramatic effects, and not necessarily ones that even Mr Wadsworth might want.

    It has also struck me as counter-intuitive to say that a way to promote growth is to tax something more than otherwise. Even without LVT, property does bear some kind of tax in the UK, say (various things such as stamp duties and the like).

    No, let’s focus on the general issue: getting taxes down across the board, removing loopholes and cutting rates to keep it nice and simple.

  4. People getting richer is the problem for Ritchie. He is firmly in the camp of “tax as a weapon”.

  5. “People getting richer is the problem for Ritchie”

    No, he’s only against “some” people getting richer, particularly those employed in the private sector and/or genuinely entrepreneurial wealth creators. I guess he has no objection to “eco-entrepreneurs” (eg Dale Vince) whose wealth “creation” is purely the privatisation of taxpayer-funded subsidies.

  6. JP — Someone tell Mark Wadsworth about Winston Churchill’s definintion of a fanatic.

    “A fanatic is one who can’t change his mind and won’t change the subject.” — Winston Churchill

    So Mark comments on a post about tax changes and its effect on tax revenues and growth with a comment on the effect that LVT will have on tax revenues and growth, and this is somehow off-subject? And when have you shown a willingness to change your mind, Jonathan, about LVT? Or is it only fanaticism if someone consistently disagrees with your unchanging desire for what I can gather is a low-rate flat tax and zero taxes on land?

    “It has also struck me as counter-intuitive to say that a way to promote growth is to tax something more than otherwise.”

    It is also counter-intuitive to some people that the creative destruction of the market is good for society and also (apropos to the post) that lowering marginal tax rates can boost tax revenue (at certain levels of tax rates). The problem with intuition is that it acts in place of reason to obtain knowledge. Here are some people who saw past the counter-intuitive nature of LVT and endorsed it:

    The property tax is one of the least bad taxes, because it’s levied on something that cannot be produced — that part that is levied on the land.

    — Milton Friedman, Nobel laureate in Economics (1976)

    The landowner who withdraws land from productive use to a purely private use should be required to pay higher, not lower, taxes.

    — James Buchanan, Professor of economics and winner of the 1986 Nobel Prize; from a lecture at St. Johns University, New York City

    Both ground rents, and the ordinary rent of land, are a species of revenue, which the owner in many cases enjoys, without any care or attention of his own. Though a part of this revenue should be taken from him, in order to defray the expenses of the State, no discouragement will thereby be given to any sort of industry. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground rents, and the ordinary rent of land are, therefore, perhaps, the species of revenue, which can best bear to have a peculiar tax imposed upon them.

    — Adam Smith, writing in the Wealth of Nations

    And, of course, any standard Econ 101 textbook will tell you that a tax imposed on something with a perfectly inelastic supply will incur no deadweight loss. But since you have supplanted reason for intuition, you are at odds with what others can plainly see once they actually use reason to arrive at a solution.

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