This is just excellent, isn\’t it?

Unfortunately for her, as I show, there was no Laffer effect at all. Far from income going down in 2010-11 as Laffer would predict, it actually went up once one of tax avoidance was adjusted for.

If we ignore the things that people do to avoid taxes then we can show that people don\’t avoid taxes.

8 comments on “This is just excellent, isn\’t it?

  1. The Laffer effect is usually explained as being due not only to avoidance but also to high earners doing less work if they get less net pay for it.

    Tim adds: Note, also. Not exclusively, as Ritchie is trying to portray it.

  2. Avoiders will avoid anyway, whatever the rate. Avoidance facilitators will set their fees at a level below what would be paid, whatever the rate, and I am sure that more avoidance facilitators sprang into being with the prospect of more profits.

    That’s not anything resembling laffer at all.

  3. Arnald.

    No. Avoiders increase their level of avoidance as a result of higher tax rates. This is clearly part of the Laffer curve. Just because there is avoidance at all levels does not mean that the level of avoidance does not change. It is illogical to impute extra tax revenue that should have existed if avoidance had not taken place.

  4. In fact it is equivalent to saying people would have worked harder/not left and that these numbers should be added back in.

  5. Do also remember that avoiding tax *costs* some money, on admin and other fees etc, and possibly on lower returns on investments.

    So for it to be worth it the money saved by paying less tax has to be more. Money, to a certain extent, is “sticky”, so it suggests that the effect you will get from the Laffer curve on the amount of tax people will try and avoid has a non-linear relationship.

  6. Ken
    No. People base their lives on more than tax rates.

    Were there fewer or more cases of ‘workplace injury’ compensation cases before it became advertised that there were hundreds of numbers to call to claim?

    Same with payday loans.

    Same with anything like this.

    Most people living in the uk would stay living in the uk and pay the tax due without bothering, if they weren’t already (folk getting millions in earnings would already be conniving), to get overly het up about it.

    It’s called living in a country.

    Not some imaginary place where your ideology poops rainbows.

  7. Arnald

    Which is precisely why we expect higher rates of taxes for high income earners to result in more tax avoidance. This is the marginal* effect of higher tax rates – that reduce tax take as income tax rates rise above a certain threshold. Since Murphy is claiming that if we just add back in tax avoidance tax would rise, he is basically confirming that higher rates leads to more avoidance and that we are on the wrong side of the Laffer curve.

    If you’re claiming that we see more avoidance because of the fuss – this misses the basic point – it is the higher rate that causes avoidance, not the advertising of the availability of tax avoidance schemes. It is possible that tax avoidance schemes are getting more press, but this is less likely to be having an impact than raising marginal rates by 10%.

    The effect is pretty simple:

    Earnings £1 million.
    Tax = £400K (gross simplification)
    Cost of tax avoidance scheme £100K, that saves 25% of tax.
    taxpayer indifferent.
    Tax rate = 50%, now the taxpayer pays £100k for the avoidance scheme and pays tax of just £375K, and saves £25K.

    It’s called economics. It tells us what actually happens in the real world rather than the fantasies of Richard Murphy and UKUncut. It is their ideology that poops, well, poop.

    *The word marginal refers to the fact that at the margin certain things occur – and the marginal effect of a higher tax rate is to raise tax avoidance – although the effect of this may or may not offset the increase in the tax take due to the higher rate (although in this case, Murphy appears to be saying it reduces it).

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