More unlearning economics

7. Sin taxes don’t discourage addicts because they need the products that much. High taxes on the rich, however, will discourage them, despite the fact that they are the most driven and innovative individuals in society.

Because elasticity. Look it up.

We can and do impose high taxes on those so called sin products because we know that demand is pretty inelastic with respect to price changes.

We also have pretty good estimates of the response of the wealthy (and, indeed, of the poor to the much higher tax and benefit withdrawal rates they sometimes face) to marginal tax rates.

The advice is therefore that marginal income tax rates should be lower than those sin tax rates.

Because elasticity. Worth looking it up really.

4 comments on “More unlearning economics

  1. So rich people are money addicts? I suppose for the %age who are, and to the (minimal) extent that the important thing is the size of the top line of the pay statement not the money in the bank, high tax rates wouldn’t be a disincentive.

    But he’s making a circular argument.

    Back in the real world, people want stuff. Almost every body wants a different mix of stuff and some people are entirely happy with much less than others. To get some of that stuff, we need money.

    So we sacrifice our time (some willingly, because they like their jobs, some less so because their job sucks, most of us variably, because the job has good and bad bits) so we can get money to get that stuff we want that money can buy. It’s not difficult?

  2. Elasticity is an economic concept and he’s trying to unlearn economics. So presumably he won’t look it up.

  3. I didn’t like his list either but I think you’re missing the whole point on this one. I’m pretty sure he understands the argument around sin taxes. What he’s asking is why this doesn’t also apply to entrepreneurs, who he asserts are “driven” and therefore apparently insensitive to taxes on their earnings.

    I’m not sure how strong a case it is, but I don’t think he misses the elasticity explanation. Indeed, that’s his whole point, isn’t it?

    Tim adds: I’ve not moved country over sin taxes. But I have decided which country to move to around sin taxes. As I have taxes on entrepreneurs….

  4. It has been demonstrated that *Some* entrepreneurs are driven and will not be deterred by marginal tax rates of 98%. It has also been demonstrated (Howe et al) that *most* entrepreneurs are deterred by high tax rates. I personally have no problem with Geoffrey Howe’s 60% top rate (partly because I used Covenants and now use Gift Aid so I didn’t actually ever pay 60% but I should have paid up if my income went over the threshold) but I can see 50% as a deterrent level (“why work if the government gets more than you do”).
    The elephant that stands outside his mud hut is the 80+% marginal rate of tax on lower incomes introduced by Gordon Brown.

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