Ritchie on tax incidence again

Sigh.

And the one thing that all economists are sure of is that the incidence of employer’s national insurance is on labour – and that without it wages would simply be higher instead. Unambiguously this charge is a tax on labour. It’s a complete and gross misrepresentation to suggest otherwise…..

That\’s not quite what the argument is, no. Who bears the burden depends upon the relative elasticities. We do assume that given the elasticities prevalent in the economy that from the majority to all falls on labour yes.

So it isn\’t that unambigously this is a charge upon labour. Although we can take it as a good working assumption that it is.

However, let us take this argument as Ritchie has presented it. Employers\’ NI is unambiguously a charge upon labour.

What does that do to actual tax rates in this country then? 45% top income tax rate for next year, 13.8% employers\’ NI, 2% employees\’ NI above the cap. You can\’t add them directly but because I can\’t be bothered to work it out I shall.

60.8%. And the Diamond and Saetz paper tells us that, in a tax system with allowances (as we inevitably have in the UK because people can leave the country and yes, this is an allowance in the sense that D&S use the word) the peak of the Laffer Curve is 54%.

Thus, using only Ritchie\’s arguments plus a paper that Ritchie himself has approvingly quoted we find that the UK income tax system is over the peak of the Laffer Curve.

Well done Richard, well done indeed.

62 comments on “Ritchie on tax incidence again

  1. Actually if we’re looking at percentage of the gross it’s 60.8 / 113.8 = 53.4%, so Osborne’s landed us pretty much bang on the Laffer curve peak.

    But I think you said before that the UK Laffer peak is probably lower than this US one, since they tax on citizenship and we tax on residence.

  2. All these pseudoscientific concepts like Elasticity, Laffer Curve etc are all bogus rubbish tbh, designed by neoliberal economists to justify cutting taxes for the rich. They claim, “Oh, you can’t increase the top rate of tax because rich people’s income elasticity of labour supply is high”, and that, “You can’t increase the top rate of tax, we’re over the Laffer Curve”.

    These complicated sounding concepts were purely designed to befuddle and confuse ordinary people, so that they would accept the wisdom being given by so called economic experts unquestioningly, which would allow the rich to get richer and for business to keep getting favourable policies.

    I think it was Richard Feynman who talked about Cargo Cult Science, and Economics is a prime example of it (although Feynman wasn’t talking about Economics) From a distance, it looks like a science, with its mathematical exposition and greek letters, academic journals, terms borrowed from the proper sciences like elasticity, equilibrium, etc, but when you actually study the subject (and I have, being a final year undergraduate economics student) you realise what load of total bollocks it really is.

    Even my Macroeconomics lecturer in my second year said the subject was extremely weak, full of nonsense and dominated by neoliberal apologists who justify the status quo.

    You can have a debate about tax incidence, but using the tools of a pseudoscience like economics doesn’t get us anywhere.

  3. “You can’t increase the top rate of tax, we’re over the Laffer Curve”.

    These complicated sounding concepts were purely designed to befuddle and confuse ordinary people…

    Speak for yourself, bud. If you can’t understand the concept of the Laffer Curve, you’re probably best off leaving tax policy to others.

  4. I do understand the concept, and if it was explained to most people they would as well, but Economists use a load of fancy sounding names and concepts to obfuscate matters, so that the public think, “Oh, this is too complicated, I’ll just accept what these experts are telling me”.

    Tax Policy is complicated and important, too important to leave it in the hands of economists, who use their simplistic ideological assumptions about utility maximisation, perfect information, elasticities etc to create this make believe world where the only path to economic success is flat taxes, 0% corporation tax, deregulation and the abolishment of any social safety net.

    This is why I think the subject is a fraud, and the day that it is considered of the same academic value as astrology will be a great day for humanity.

    Tim adds: Enjoy paying off your student loans then, given that what you’ve been paying for is about as useful as astrology.

  5. it is interesting how the Murphmeister chops and changes on subjects such as the Laffer curve and tax incidence. you never know from one hour to the next whether he agrees with them or disagrees with them.

    And SR8 19 sounds like a version of the Murphmeister who has learned to use consecutive sentences. Although his understanding of economics is equally strange.

  6. “…the public think, “Oh, this is too complicated, I’ll just accept what these experts are telling me”.”

    Which is how the AGW climate change campaigners get away with making it sound like the end of the earth is just around the corner unless we all start using solar panels and wind turbines.

    “Tax Policy is complicated and important, too important to leave it in the hands of economists”

    So whose hands should it be in? Accountants, politicians, bankers, or the general public, or possibly people who study it to some extent?

  7. My understanding of economics is based on the bullshit we’re taught at universities, which is simply an attempt to brainwash us into believing that greed is good, and that carrots/incentives should be given to the rich (i.e. tax cuts) to improve their behaviour while sticks should be used against the unemployed to get them back to work (by cutting benefits). And they have the cheek to claim their discipline is a science rather than an ideological construct whose sole purpose is the defend the interests of the 1%.

    And tax policy should be left to independent experts who don’t ex ante have some ideological bias, like economists who bleet on about elasticity, behavioural changes and other pseudoscientific concepts. So a combination of mathematicians, accountants, other social scientists should be employed to discuss tax affairs. Leave the economists out.

    Tim adds: Then you really ought to pay a bit more attention.

    The argument is that very high tax rates do indeed reduce incentives. Thus 70%, or 60%, on top earners is a bad idea.

    And exactly the same thing is said about those on benefits. Marginal tax and benefit withdrawal rates of 60 and 70% are a very bad idea. Something that we must do something about, Why, you could even read the last budget which shows that there are million,s yes, millions, of people on benefits who face such marginal rates of 60% or above. Some poor sods are even on over 100%. If they earn an extra pound they lose more than a pound in cash.

    It isn’t a different argument at all: it’s exactly the same damn bloody argument. High marginal rates are disincentives and we want to do something about that at both ends of the income spectrum.

  8. SR819

    You reference Feynman in support of your proposition and then immediately admit that he wasn’t talking about economics, not very convincing.
    You also claim that economics as taught at universities is “.. simply an attempt to brainwash us into believing that greed is good, and that carrots/incentives should be given to the rich (i.e. tax cuts) to improve their behaviour while sticks should be used against the unemployed to get them back to work (by cutting benefits). And they have the cheek to claim their discipline is a science rather than an ideological construct whose sole purpose is the defend the interests of the 1%.” However you rather contradict that by saying this, “Even my Macroeconomics lecturer in my second year said the subject was extremely weak, full of nonsense and dominated by neoliberal apologists who justify the status quo.” Then there’s this, “And tax policy should be left to independent experts who don’t ex ante have some ideological bias.” How on earth do you propose making policy without some political view of what that policy should be ?

  9. SR819 is, in a strange kind of way, correct. There isn’t any Laffer Curve, and its popularity is indeed largely because it appears to support rightwing (as opposed to proper free market) economic ideology; specifically that you shouldn’t tax rich people because they generate wealth via a form of stimulus spending (hiring nannies and gardeners), which is the classic trickle-down fallacy.

    Leaving the theoretical arguments aside, it is pretty damned obvious that people deciding whether to stay in or leave a country aren’t going to base such decisions entirely on a single aggregated national tax level, which is a different figure to any individual’s particular tax incidence, across a range of personalities, ideologies, and national cultures. This is a typical example of why attempting to do economic arithmetic with aggregate variables tends to lead to great folly.

    There is one obvious debunking of the Laffter Curve; it is predicated on the belief that if the “aggregate tax rate” is 100%, then tax receipts will be zero. This is not true. Tax receipts would be, in that scenario, equal to the money supply. Which brings us to another bit of simple math; the tax take is simply the liquid money supply multiplied by this average tax rate (which can only be itself ascertained post hoc, hence the impossibility of anyone predicating their actions upon it).

    Hence, tax receipts are a simple proportion of whatever money supply the government and banks conjure up between them. There ain’t no Laffer Curve. There are other curves, but no Laffer. Sorry.

  10. “Even my Macroeconomics lecturer in my second year said the subject was extremely weak, full of nonsense and dominated by neoliberal apologists who justify the status quo.”

    Our status quo isn’t neoliberal.

    Government spending is 46% of GDP (http://www.guardian.co.uk/news/datablog/2010/apr/25/uk-public-spending-1963)

    And what it doesn’t spend it tries to control with red tape and regulation.

    But your lecturer is right on one point, economics is certainly full of nonsense, and it’s generally propagated by the useful idiots of the left.

  11. On a matter of linguistics, I have noticed that the usage “rightwing” as one word generally accompanies lefty drivel.

  12. Golly, which universities are teaching “that greed is good” (SR819 #7)?

    I only ask because it’s useful to draw up a list of places that might offer me a job.

  13. I do understand the concept, and if it was explained to most people they would as well, but Economists use a load of fancy sounding names and concepts to obfuscate matters, so that the public think, “Oh, this is too complicated, I’ll just accept what these experts are telling me”.

    Ah, the standard “everyone is thick except me” line so beloved of lefties worldwide.

  14. And does SR819 really believe that “concepts like Elasticity, Laffer Curve etc are all bogus rubbish”?

    I could understand if he claimed that they are impossible to measure with any useful degree of precision, but to claim that the concepts are rubbish seems a little sweeping.

    Is price elasticity really “bogus rubbish”? Do we really carry on buying the same amount of stuff if its price (relative to other stuff) increases?

    That’s the whole underlying concept of green taxes (and tobacco duty) out then.

  15. On a matter of linguistics, I have noticed that the usage “rightwing” as one word generally accompanies lefty drivel.

    Sorry about that. You probably need to devise some better heuristics then. Broadly in this context I use, or was using, “rightwing” to refer to the statist right, who like to combine big government spending and intervention with calls for low direct taxation of the better off, thus shifting the tax burden onto the poor by indirect taxes (tarriffs, consumption taxes, etc). They normally justify this, as I said, with a kind of private-sector Keynesian narrative about how lowering taxes on the rich will stimulate the economy because they’ll spend more, hire servants, etc. And, tend to use imaginary econometrics like the Laffer Curve to justify that.

    The correct position of course is the liberal one, which advocates for low taxes achieved by genuinely small government.

  16. Also:

    and its popularity is indeed largely because it appears to support rightwing (as opposed to proper free market) economic ideology; specifically that you shouldn’t tax rich people because they generate wealth via a form of stimulus spending (hiring nannies and gardeners), which is the classic trickle-down fallacy.

    Bit of a strawman, that. Most people who write about the Laffer Curve simply state that there is a point at which higher rates of taxation will not result in higher tax receipts; and that high marginal tax rates does have an effect on incentives. It does not require any mention of stimulus spending, etc.

    Leaving the theoretical arguments aside, it is pretty damned obvious that people deciding whether to stay in or leave a country aren’t going to base such decisions entirely on a single aggregated national tax level…

    That’s where you’re wrong, I’m afraid. In 2009 the Australian government shifted its policy on taxing expatriates from one based on residence to one based on “socio-economic”. In practice, if you had a residence in Australia where your family lived, then you were liable to tax even if you yourself lived and worked abroad. The Australian expatriates in the oil business went home in droves, as there was now little point in working overseas when you’re taxed at home.

    True, this isn’t the same as people leaving the country when taxes rise, but you are wrong to say that a country’s taxation policies has no effect on worker migration.

  17. There is one obvious debunking of the Laffter Curve; it is predicated on the belief that if the “aggregate tax rate” is 100%, then tax receipts will be zero.

    For income tax, this is true. Corporation tax too, most probably. And discussion of the Laffer Curve are usually associated with income tax.

  18. I think the general reason we really need to dump this Laffer Curve rubbish is that it’s an example of a very bad for of argument in which you try to pretend that your policies will achieve the goals of your opponents. This is a major strategic error. As an example, people opposed to the drink Licensing Laws used to say, “if you let people drink any time, they will drink less”; the idea being to appeal to the Temperance Movement. This wasn’t actually true, and I think we all knew it.

    So sure enough, Labour called the bluff, and people didn’t stop getting drunk, and so now we’re in this miasma of minimum pricing and so on.

    So likewise, the argument “If you lower taxes, tax receipts will rise”. It is an attempt to pander to statists, particularly leftists. But as (I think) Milton Friedman said, the point of lowering taxes is not to raise more taxes, it is to starve the government.

    We really, really, have to be honest about that. To call for lower taxes is to call for lower State spending, not higher State spending. The Laffer Curve is thus an extremely bad argument. And none of the lefties or statists believe it anyway. So we just look silly.

  19. I think the general reason we really need to dump this Laffer Curve rubbish is that it’s an example of a very bad for of argument in which you try to pretend that your policies will achieve the goals of your opponents.

    I don’t agree that because an economics concept is misused we should dump it.

  20. There is one obvious debunking of the Laffter Curve; it is predicated on the belief that if the “aggregate tax rate” is 100%, then tax receipts will be zero.

    For income tax, this is true. Corporation tax too, most probably. And discussion of the Laffer Curve are usually associated with income tax.

    Do you mean that it’s true that tax receipts for 100% income tax will be zero? Nope. They’ll be 100% of the money supply. (Presume that the only tax in the economy is the income tax, levied as PAYE, and it should become clear). It’s basically a kind of fascist economy in which all trade is State->business or business->business, the worker gets a pay slip but no actual cash, and thus all goods and services are provided either directly by the State or by businesses (National Health or Employer Provided Healthcare, National Food Service, Council Housing, etc etc).

    A weird economy, but that’s one end of the curve. The money supply circulates from State to businesses and back to the State, and the tax receipts are simply the entire money supply, whatever that may be. They aren’t zero.

    Bear in mind that the LC was originally invented by a bureacrat-economist on the spur of the moment and drawn on a napkin for a US president. It incorporates this basic error that invalidates it.

  21. IanB, I’ve asked this before, but why would most people (other than a few fanatics) work under your system?

    Either:
    a) those State benefits are dependant on working, in which case tax isn’t really 100% (because there is some post-tax income, even if it’s only in kind rather than cash)
    or
    b) we have enforced labour, in which case we’re so far from our current society that it isn’t any use as an example.

    If you prefer, we could say that the Laffer Curve works in a free-ish society where state benefits and services are universal.

    Since that’s the society we’re in, and for which we are trying to determine the optimal tax rate, that would be fine by me.

  22. Sorry, by ‘your system’ I mean your hypothetical 100% tax society. I’m not accusing you of actually advocating such a thing.

  23. Richard, it’s the extreme end of the curve so discussing it as a reality is like discussing the zero tax, no defence, no government at all end. It would take a strange kind of people to adopt such a system. It’s thus hard to discuss them as “real people”.

    But we can say that people may have to work in order to gain access to all the State and employer provided benefits, otherwise they’d be homeless and starving. It’s a kind of total workfare system. The worker may get a better food allocation for doing one job than another, a better house from the Council, holidays at the State resorts, and so on.

    Ghastly, but imaginable.

  24. Yes, but I don’t think that’s really a 100% tax (see my (a) in 22).

    Under a true 100% tax you get no after-tax benefit from working (or working harder or doing a more difficult job).

    What you hypothesize might be an immediate 100% tax, but if you then get something back in return (and in some way proportional to) your work, it’s not really a 100% tax; it’s just a non-cash wage.

    But I agree that the real challenge isn’t Laffer, it’s over-turning the basic assumption that more tax and public spending are good things.

  25. But I’m not sure that a 100% tax is too ludicrous to really consider – it’s the policy of the man who’s currently running 4th in the French elections.

    Yes, he’s proposing it as a top marginal rate, but can’t marginal rates have their own Laffer curve?

  26. Richard, the argument regarding Laffer only takes into account money-system income, not income in kind. So a 100% Laffer tax is 100% tax on financial income. Taxpayers currently are getting State healthcare, schools, roads, air traffic control, SureStart tai-chi courses and numerous other benefits, but we don’t include them in the income calculation because they’re not part of the person’s financial income and thus not taxed or taxable.

  27. IanB, no, we currently exclude benefits as income not because they’re non-cash but because they’re universal.

    You get them irrespecive of whether you work or what you work at, so they don’t affect the incentive to work.

    But your hypothesis is for job-related benefits, which are just another form of income, and would certainly affect the incentive to work (which is what Laffer is based on).

  28. I think you’re reaching now Richard. The point is that however our hypothetical society distributes its wares, the tax income simply equals the money supply, not zero.

    At other tax rate it is a simple proportion, because “the aggregate tax rate” and “tax receipts” are the same measurement; that is you can only measure the actual aggregate tax rate post hoc, by measuring how much tax people actually paid, unless you actually collapse it down to a true single tax rate- in which case the simple proportionality becomes obvious anyway.

    So what Lafferists are measuring, if anything, is the magnitude of the money supply which, due to a bizarre and ultimately unsustainable banking model, goes up and down like a whore’s drawers and which is entirely dependent on the shape of the financial system. It acts as a very crude proxy of production, but emphasis on the “very” there.

    So when the econometricians start measuring things, they find a curve of sorts. But it’s not measuring what they think it’s measuring.

  29. Do you mean that it’s true that tax receipts for 100% income tax will be zero? Nope. They’ll be 100% of the money supply.

    No, because the point being made by those who cite the Laffer Curve is almost always in the context of a government trying to balance a budget, and therefore represent net tax receipts. What you’re talking about are absolute tax receipts, which mean nothing when removed from the context of what the government has on the expenses side of the ledger. What is meant by people who say that income tax receipts will be zero at the end of the curve is that the government will receive no net income.

  30. Tim, I think you’re making shit up, there. Every example of the laffer curve and discussion thereof I can bother to find on the interwebs merely talks of “tax revenue”, which supposedly falls to zero at 100% because everyone stops working.

    As I’ve said multiple times, the government’s income in the 100% scenario is equal to the money supply. That’s all there is to it.

  31. Richard, IanB

    “It’s a kind of total workfare system”

    “Under a true 100% tax you get no after-tax benefit from working (or working harder or doing a more difficult job)”

    It’s called “slavery”, I think.

  32. 1) The Diamond and Saez paper does not tell us what the revenue-maximizing tax rate is. It gives us a formula which (subject to their assumptions) allows us to calculate such a rate (the marginal rate on high earners), if we know the elasticity of taxable income and a parameter describing the shape of the high-end tail of income distributions. The 54% Tim quotes is just a number he likes.

    2) Diamond and Saez are not neoliberal economists seeking to justify tax rates for the rich. What SR819′s economics lecturers should have told him is to look stuff up rather than relying on their prejudices or his own.

    3) When Murphy cited the Diamond and Saez paper, he did not of course mean that he agreed with its methods, or had even looked at them. He meant that he liked the look of a number for the revenue-maximizing tax rate some blogger had calculated using the D&S formula (it was much higher than Tim’s 54%).

    4) There is no evidence that mediaeval scholasticists ever debated how many angels can dance on the head of a pin. But it seems that contemporary blog commentators do discuss how much tax might be raised by a 100% rate. Perhaps I should spend more time on scholasticism and less on blogs.

  33. Tim, I think you’re making shit up, there. Every example of the laffer curve and discussion thereof I can bother to find on the interwebs merely talks of “tax revenue”, which supposedly falls to zero at 100% because everyone stops working.

    Yes, because it is pretty much a given that a situation where the government is paying 100% of its taxes is, for all intents and purposes, a situation whereby tax revenue is zero. it would be like a company buying its own products and claiming revenue, which although technically correct is bollocks in the context in which the company sits.

    As I’ve said multiple times, the government’s income in the 100% scenario is equal to the money supply. That’s all there is to it.

    No, I’m afraid you can’t just repeat yourself and declare there is nothing left to say. You seem to think everyone is wrong about the Laffer Curve because they do not interpret it the way you do, even to the extent that when people – like me – have said what we mean we actually don’t really mean it, and we – what, subconciously? – mean what you do.

  34. Frances-

    It’s called “slavery”, I think.

    Effectively, yes, but that’s a moral judgement. One can reasonably argue that we’re all round about 40%-50% slaves at the moment. Or, beneficiaries of a socially regulated system. Take your pick.

  35. Ian B,

    I wasn’t thinking of it as a moral judgement so much as an accurate description of bonded labour, where the labourer is provided with his living needs but receives no remuneration.

  36. Tim-

    Yes, because it is pretty much a given that a situation where the government is paying 100% of its taxes is, for all intents and purposes, a situation whereby tax revenue is zero.

    There’s no “all intents and purposes” about it. It’s a situation in which tax revenues are equal to the money supply, and that’s that. There isn’t any other interpretation.

    You can do it without money if you like; it becomes a kind of Winstanley style communism then, in which case everyone works in the fields, brings their produce to the common storehouse, and then is given what they need from the common storehouse. The requirement to bring their produce to the common storehouse is the 100% tax.

    it would be like a company buying its own products and claiming revenue, which although technically correct is bollocks in the context in which the company sits.

    “Technically” correct is what matters in this discssion. In the context of the entire economy, you may as well treat it as one company that buys its own products. That’s how the economy is. Stuff circulates.

    We’re about 50% of the way there, as it is. Large amounts of money circulates between state and contractors, and is snatched straight back as PAYE and NI. People still talk about their wage as if it were the gross written on their payslip, even though they don’t get to touch much of it. The government taxes its own employees. 100% is just the extreme of that.

  37. Frances #36

    I entirely agree, and as noted above I’m not advocating this. It’s ghastly. I’m simply exploring whether that right hand point on the Laffer Curve is anchored to the X axis or not.

  38. There’s no “all intents and purposes” about it. It’s a situation in which tax revenues are equal to the money supply, and that’s that.

    No, it isn’t. Period.

    See what I did there? It’s a bit silly, isn’t it?

    “Technically” correct is what matters in this discssion.

    Well, not for those of use who want to discuss the Laffer Curve in a conventional manner it doesn’t. I fully understand that you have your own interpretation, but you cannot expect the rest of us to stop discussing it because you don’t like how we interpret it.

    People still talk about their wage as if it were the gross written on their payslip, even though they don’t get to touch much of it.

    Yes, and the Laffer Curve assumes – somewhat correctly IMO – that if the employee gets nothing then the job would not exist as nobody would do it. You seem to think that at the extreme, people would come to work and do a job in return for state provided services. I am more inclined to believe that such a society could not exist beyond a handful of people and that the extreme end of the Laffer Curve is impossible to achieve in practice: you would simply have to pay some people cash for the system to remain.

  39. Tim, the reason I keep stating that is that some facts are facts and as such hard to justify beyond statement. If I assert that atmosphere is gaseous, I cannot bring another argument to the table. It’s made of gases. That’s all there is.

    You can’t answer my point, because, simply, I am right and you are wrong. Whether you believe such a society is practical or not is neither here nor there. We are discussing what sort of money flow the hundred per cent point represents, and it isn’t “no money at all”. I don’t think that, in general, people would tolerate such a society. I doubt that many people would tolerate the 0% point either (pure anarchism) but that doesn’t mean we can’t put it on the graph. What we are saying is, “how much tax does the State get in these implausible tax rate scenarios?”. And the answer is, that at the hundred per cent point, it gets 100% of whatever the money supply is.

    So, I’m not discussing an “interpretation” here. It’s not the fucking bible. It’s not Shakespeare. It’s a graph. It’s arithmetic. And it is demonstrably wrong.

  40. Tim, the reason I keep stating that is that some facts are facts and as such hard to justify beyond statement. If I assert that atmosphere is gaseous, I cannot bring another argument to the table. It’s made of gases.

    No, you’re not stating facts. You’re applying your own criteria to a situation and claiming that only your criteria are valid. And this is not the case as you make one enormous great assumption which nobody else makes.

    You can’t answer my point, because, simply, I am right and you are wrong.

    So you keep saying. But you’re only right in the case where your own interpretation applies, and it is only you who interprets things this way.

    Whether you believe such a society is practical or not is neither here nor there.

    Well, I’m afraid it is, because in order to ascertain what happens at that point is how have to look at how one gets there. And you don’t do that, you merely assume a theoretical situation which is utter bollocks.

    And the answer is, that at the hundred per cent point, it gets 100% of whatever the money supply is

    No, you’re assuming that there is any work being done at all. How can a government tax 100% of an activity which is not being done, and nobody is doing it? That assumption, that people will be working for no cash return, is one you have dreamed up all on your own and is at the root of why you don’t accept the graph. For those who believe that nobody will be working under such a regime then the graph holds.

    So, I’m not discussing an “interpretation” here. It’s not the fucking bible. It’s not Shakespeare. It’s a graph. It’s arithmetic. And it is demonstrably wrong.

    No, I really think that you don’t understand what you’re looking at.

  41. I believe that Marx stated that in his Utopia, the People would own all the assets and all the income and that, therefore, there would not need to be taxation to fund the state – the state would be funded as a share-out of the People’s total income.

    He did not envisage any need for taxation. So this debate is more than a little academic, surely.

  42. Tim, are you being deliberately obtuse? I know that you aren’t thick from your numerous posts here, so I am starting to think you are arguing for the sake of it.

    Look. In order to plot a point on the graph, you have to presume that the society represented by that point exists. Same as the other end, the 0% point. Now lots of people might say that the total-anarchist society at 0% is also impracticable. In particular, with no defence, it would immediately get conquered. Maybe. Maybe not. But it’s a point on the graph, so we’d have to discuss what economics would apply if it did exist.

    So I’m not assuming anything. The graph itself assumes a society, with people in it, with 100% tax, and then plots a point on their behalf. So we have to ask, where should that point be?

    I don’t give a monkeys whether you would like it. I wouldn’t either. But such a hypothetical society has a predictable economic form, and I have already explained what that is.

    You’re the one making all sorts of assumptions, not me. You can assume that such a society could never come into existence. That is probably true. But because it is on the graph, we have to explore it anyway.

    Look, go down the curve a bit. Go to 95%. Nearly everything is provided by the State, and you get a little bit of pocket money to spend on sweets. Horrible? Yes. Impossible? No. Now work up-96, 97, 98. The spending just shifts more and more to the public sector.

    If you really can’t grasp what’s wrong with the graph now, I’m going to have to conclude you really are just thick.

    And yes, that above sentence there is insulting. But for heaven’s sake Tim, this isn’t difficult.

  43. Having posted that, I just thought of an easier explanation to get you around your mental block. Presume that, as we might predict, production collapses under this communist-fascist-whatever 100% tax society. What disappears is the goods and services. The money itself doesn’t disappear. The State will still rake in 100% of the money supply even if there is nothing to spend it on.

    Does that help?

  44. @ Ian B
    What you fail to realise is that sometimes people will choose not to work if they think that the reward for so doing is not worth the effort.
    This is a real fact.
    This fact destroys your arguments.

  45. I think Ian is right in that in a totalitarian state where all work was owned by the state their would inevitably be compulsion to work and there for tax would be raised. However, it’s also pretty self evident that the amount raised would decline because:

    Many current goods and services would hold no interest to a totalitarian state and these people would be moved into less productive work of more use.

    With no way of measuring work beyond done and not done, people would do the bare minimum.

    Quite where the final figure would rest I don’t know, but it’s pretty clearly going to be lower than every other point on the graph except an area near 0%.

    Therefore the Laffer curve does exist. It starts at 0%, rises to some peak or plateau then descends to a second low point at 100%. Just because 100% does not represent zero income does not invalidate the existence of the curve.

  46. Okay, let’s try this. Imagine everyone in the (present, real) economy works 20 more hours this year than last year. Now, they all deserve 50% more pay. Where does the money come from?

    Now, imagine everyone in the economy decides to work 20 hours less. The national wage bill is halved. Where does the money disappear to?

    Does that help?

  47. I think it would less problematic to state that if the marginal tax rate were 100%, then there would be 0% revenue above the point where it started, or at the very least an extremely small amount of revenue (possibly some people might fall foul of it due to not being able to alter existing contracts for example, or the inability to work out how much profit a business had made at any exact given point in time).

  48. Tim, are you being deliberately obtuse? I know that you aren’t thick from your numerous posts here, so I am starting to think you are arguing for the sake of it.

    No, I’m not. Seriously, everyone other than demented lefties who discuss the Laffer Curve believes they know what it represents, and are quite happy to spend a few decades discussing it on this basis. Then you come alone – all on your own – and claim that the whole thing is bogus and everyone is presumably too thick to understand what you alone know.

    Sorry, this is the methodology of those demented lefties who discover fractional reserve banking and feel the need to alert the world.

  49. But it’s a point on the graph, so we’d have to discuss what economics would apply if it did exist.

    One in which nobody worked at all. As I’ve said, this is far more likely to be the natural state of affairs in a society where nobody got paid any money for doing work than your version whereby everyone keeps working regardless.

  50. this is far more likely to be the natural state of affairs

    This is the problem you’re having. You’re applying what you think you would do to the society and declaring that to be what would happen. You need to drill through that to get through the math.

    everyone other than demented lefties who discuss the Laffer Curve believes they know what it represents, and are quite happy to spend a few decades discussing it on this basis.

    Ho hum. “Everyone” believes in stimulus spending, doesn’t mean it isn’t economic cobblers of the first water. And the LC is far less widely accepted.

    Anyway, I think part of the problem we’re having here is a pretty basic error; taking the personal “if I work more hours I get paid more” and trying to apply that to the aggregate- “the national income is proportional to hours worked”. Which is false. It’s the same class of error as leftists who think they can raise the national income with pay rises. Which economists known is also not true, because there is the same finite amount of money to pay them.

    As to what you’d actually do, I think if your access to state food, housing, healthcare, etc were dependent on you turning up for work and not getting sacked, you’d turn up for work, and do enough work to prevent you getting sacked. You might not like it, but it’d be better than starving to death on principle. That’s just my guess of course.

  51. You’re applying what you think you would do to the society and declaring that to be what would happen.

    And you’re not, I suppose? Only you seem to be the only person in the world who believes your version, and you think everyone else is wrong. Good luck with that.

  52. Logically there cannot be 100% tax on 100% of income. Otherwise you would starve. And if you get given something other than money (food/shelter etc) in return for your labour, then the tax isn’t 100% is it? 100% tax implies you work and get nothing, zilch, nada, zip in return. That can never happen, even in a slave labour camp, as even slaves get some food and shelter.

    Its marginal rates that are the important issue, not whether some society can exist where the State takes all the product of ones efforts and gives nothing in return (a situation which IMO can’t exist, and any way is so far removed from our reality as to be impossible).

  53. Logically there cannot be 100% tax on 100% of income. Otherwise you would starve. And if you get given something other than money (food/shelter etc) in return for your labour, then the tax isn’t 100% is it?

    Nope, this is wrong. Currently we pay (say) 50% tax rate, and get much of it back in services (NHS, policing, roads, defence, etc) but nobody deducts the potential value of those services from the X axis values on the Laffer Curve. This is a purely monetary thing.

    100% tax does not imply that you get nothing back. The whole point of it would be to give you “everything back”. It is a purely monetary matter.

  54. Nope, it’s 100% of the wages. Which are not zero.

    I am fairly sure that wages are zero when a job doesn’t exist and nobody is doing any work.

  55. When tax is 100% of 100% of income, then there is no money. No one has money except the State (in whatever form the money takes – gold coins, bead, bits of paper), and it just sits there in the treasury doing nothing. It is a State of zero monetary transactions. I work, I get no net pay. In order to survive I have to be provided with food and shelter by some form of collective provision, for free, as I have no money. Those that provide food and shelter have no money either as their ‘customers’ cannot pay for it.

    There is no money, so there is no tax revenue.

  56. Jim beats me to one point I was going to make, but I’ve got another.

    Ian B, you seem to have missed a point. The shape of a Laffer curve for a particular economy depends on elasticity, openness etc, as per Diamond/Saetz, or more generally on the ability of people to respond to the incentives created by the tax rate.

    Your interpretation is one where this ability is zero – the state just takes everything and you can’t leave. So your only incentive is to not starve.

    Tim N’s point (as I understand it) is essentially that in any vaguely realistic economy there will be some ability of people to respond to tax incentives. This creates a curve, and then you’re just arguing over how much freedom to respond is necessary to get that curve to dip below the horizontal at the far end.

  57. Tim N’s point (as I understand it) is essentially that in any vaguely realistic economy there will be some ability of people to respond to tax incentives.

    Exactly. This is why I said in an earlier comment that you need to look at how you get to that society in which taxes are 100%, not just decide how it would look. For as the taxes approach 100% from say 95%, fewer and fewer people will work and the country will get more and more ungovernable: even the most despotic regimes – including GULAGs – had to pay some people net cash wages. So the 100% taxed society would in all likelihood not exist, as nobody would be doing any work and whoever was trying to impose such a system would wake up with their throats cut. Now that is responding to tax incentives. :)

Leave a Reply

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

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>