And Howard Reed is an ignorant buffoon as well

There has been some recent discussion of the Laffer curve on the blog as a result of reaction to a blog by Jolyon Maugham. As is, I think, quite well known, I am dubious about the existence of a Laffer effect at any of the current headline rates of tax in the UK, and the vast majority of those proposed. I think it may just appear if the Greens have a top rate of income tax of 60% with uncapped national insurance contributions.

In response to these comments Howard Reed, an occasional co-author of mine and a man whose work I much admire, posted some comments I thought worth sharing more widely. He said:

Most of the Laffer effect (I feel bad calling it the “Laffer effect” as Laffer is a total far-right crank and charlatan… for example, do a search on “Krugman New York Times Laffer” on Google and you’ll find several examples of why Laffer is a nutjob…) is NOT due to reduced hours or effort by high earners because the tax rate is so high. It’s due to increased avoidance activity and (e.g.) shifting remuneration from income to capital gains. A General Anti Avoidance Rule (as proposed by Richard) would put paid to most of the Laffer effect. Personally I think we would be fine up to at least 65-70% top rate but I appreciate this is a matter about which there can be intelligent disagreement. Some commentators (e.g. Saez/Piketty) have suggested that 80% is the revenue maximising top rate.

More fundamentally, it’s not clear to me that Laffer is right even on its own terms. Would the revenue yield from a 100% tax rate be zero? If we had (e.g.) a very high Citizens Income, so that no-one *needed* to work, I’m sure some people would go on working because they enjoyed their work even if tax rates were 100%. This might well be a minority of people and so I wouldn’t suggest 100% tax rates as a serious proposal, but Laffer’s argument (that the yield of a 100% marginal rate is zero) seems to me to be flawed if work conveys any positive utility, at least for some of the population. And there are certainly people around who like their jobs – for example there is evidence of people who win the Lottery and carry on in their job.

I well recall several of my staff in some of the companies I have run in my time for whom pay (and by implication, therefore, tax) was not the key or even, in all likelihood, a significant motivation for their coming to work. Various other factors were at least as big a motivational effect. In other words, I think Howard may be right with his second suggestion.

That tax avoidance is the main reason for the Laffer effect is beyond dispute. And as Howard notes, we could beat that if we wanted to.

It’s Diamond and Saez who calculated the peak of the Laffer Curve and found it to be 76%, not 80. And that’s in a hypothetically pure tax system, with no allowances. And with allowances that falls to 54%. And that’s in the US tax system, based as it is on a passport tax, not residency basis. Here in Europe we have a residency based system which is an obvious allowance: think tax is too high you can just bugger off.

There is, of course, no doubt at all that avoidance creates some Laffer effects. But Diamond and Saez reach their conclusions without considering them at all: they use the mixed influences of the income and substitution effects, the classical underpinnings of the theory. So, you can’t go around referring to their research and then conclude that it’s all about avoidance. Because their research shows it ain’t all about avoidance.

And I’m afraid that this is important, not just pendantry over the expressed opinions of idiots. Ritchie one year wrote the TUC’s Budget Submission. In which he claimed that a rise in the tax rate would lead to more labour being offered in the market. He was, obviously, assuming that the income effect prevailed over the substitution effect. Which for at least some people, some of the time, at certain income levels, it does, that’s why we’ve got a curve here. Digging deeper I finally managed to get him to explain his assumption. Which was that women married to high earners would be especially subject to that income effect and very little to the substitution effect. Much more so than the general population and that’s where the increase of labour on offer would come from.

Which is fascinating because one of the things we know we know about the income effect is that married women are less subject to the income effect than the substitution effect, much less so than the general population.

This is why these morons fuck up so often. They’ve not the slightest clue of the things they try to pontificate upon.

42 comments on “And Howard Reed is an ignorant buffoon as well

  1. Isn’t the original article refuted by what happened when Mrs T. lowered the top rate of income tax from 83% (I think) to 40% and tripled the tax take from that band?

  2. If you choose to work under a 100% tax rate, then it is not actually work; it is a hobby.

    If you have a 100% tax rate and a very high citizens income, you do not in fact have a 100% tax rate; you have a much lower rate and some book-keeping entries.

    I well recall several of my staff in some of the companies I have run in my time for whom pay (and by implication, therefore, tax) was not the key or even, in all likelihood, a significant motivation for their coming to work.

    Did he test this by asking them or by stopping their pay, I wonder?

  3. I well recall several of my staff in some of the companies I have run in my time for whom pay (and by implication, therefore, tax) was not the key or even, in all likelihood, a significant motivation for their coming to work.

    I take it he ran a company of ski seasonaires and holiday reps.

  4. “I well recall several of my staff in some of the companies I have run in my time for whom pay (and by implication, therefore, tax) was not the key or even, in all likelihood, a significant motivation for their coming to work.”

    I really, really hope they were pilfering from him.

  5. Howard Reed presents his assertion as measured fact and asserts only his own prejudices.
    Thus:-

    “Most of the Laffer effect… is NOT due to reduced hours or effort by high earners because the tax rate is so high”
    Supporting evidence for that Howard?

    “More fundamentally, it’s not clear to me that Laffer is right even on its own terms. Would the revenue yield from a 100% tax rate be zero?”
    What’s not clear to you? Based upon what Howard? And how does your personal, ahem, insight become ‘fundamental’ to economic thought?

    “I well recall several of my staff in some of the companies I have run in my time for whom pay (and by implication, therefore, tax) was not the key or even, in all likelihood, a significant motivation for their coming to work”
    Absolutely Boss. By the way, how is my performance appraisal going?

  6. I work in a fixed + variable salary scheme.

    And I can tell you that the substitution effect is alive and well – after a certain point you start to value your time more than the post-tax net of the extra you might have done. It’s the “f*ck it” effect.

    Let’s say you’re a lawyer or consultant on a salary of say £70k, who is billed out hourly at £250 / hr. Once you hit a threshold, you get say 20% of that hourly rate in variable part. So that is £50 an hour. But it takes normally about 1.5-2x that of actual, physical time to achieve that. So call it £25-33 an hour.

    Which the UK taxman is going to take 42% of – so net £14.50 to 19.15 an hour. If it’s pensionable, even less.

    What is the marginal utility of that to compared to 1.5-2hrs with the family, down the pub, etc. to someone on 70k?

    Plus, it’s not money you have to pay, it’s money you simply didn’t get in the first place, which has less impact psychologically.

    The man’s talking nonsense.

  7. btw

    Richard once wrote a guest post on Jolyon Maugham’s blog in which he insisted that not one of his clients ever showed the slightest interest in reducing their taxes. Andrew Jackson had great fun taking him apart; I suggested Richard must be the most sheltered tax advisor ever.
    Well, here we are, Howard Reed is insisting that any observed Laffer effects are mostly due to increased avoidance activity.
    The World’s No. 1 tax blogger would appear to have directly contradicted by his own little friend wouldn’t he.

  8. I love the way he cites the New York Times as an obvious refutation which needs no further explanation.

  9. Really, most employees have little or no way to vary their remuneration aside from taking on a second job (which most don’t do…… wonder why?).

    Those that can directly and easily vary their remuneration fall into fairly distinct categories:

    1. Lower paid, hourly-rate workers who have access to overtime, usually paid at the normal rate or a multiple thereof;
    2. Lawyers, consultants, etc. with a bonus scheme – who, if the stars of workload and time align, basically can put in effective overtime, which may be remunerated LESS than the equivalent hourly rate for the fixed part;
    3. The self-employed who successful enough that they are in a position to turn down work. They can thus basically choose their earnings between very little and as much as they can reasonably achieve. This includes not only the filthy rich, but also “odd jobbers”, successful plumbers/builders etc. who have more demand for their services than they could fulfil.

    It’s really the latter 2 that can experience the full force of the “f*ck it” effect.

  10. ‘Did he test this by asking them or by stopping their pay, I wonder?’

    I’ve said this before, but sooner or later some journo is going to investigate him. An ex wife, ex employees, ex clients – none of whom are going to have a good word to say about him, bearing in mind he’s a cunt. Target-rich environment.

  11. ‘I take it he ran a company of ski seasonaires and holiday reps.’

    There speaks a man who never did a ski season.

  12. ‘Did he test this by asking them or by stopping their pay, I wonder?’

    Or did he ask them to do overtime at an ever decreasing rate of return?

    Surely if there’s no substitution effect, people will always seek to maximise their remuneration. Which is why we’re all off our heads on amphetamines and working two full-time jobs, or 80-100 hours a week in one job. And why we’d all self-evidently do more if we were paid less net.

  13. It makes me unreasonably angry when cunts like these casually discuss the expropriation of other people’s income – why stop at 100%? why not take their wives children houses and dogs as well?

    In fact why not just line them all up against a fucking wall and spray with a cunting flame thrower?

    The day Ritchie hands over 100% of his salary voluntarily to the tax man my utter loathing of him might reduce by half a notch, but I’m not holding by breath.

    Bastard.

  14. Reed’s argument that some people would carry on working even with a 100% tax rate is incoherent: yes, some people will work unpaid, but that doesn’t mean they want a notional salary attached to their labour, to be paid directly to the government.

    Apart from that, I wish you, Tim, (and Murphy, but that’s not going to happen) would actually read the Diamond and Saez paper.

    1) D&S made two calculations of an optimum tax rate. One result, using broad income elasticity, was 80%, as Murphy quotes. The other, using taxable income elasticity, was 54%, as Worstall quotes.

    2) Taking into consideration a couple of other taxes, those numbers correspond to federal income tax rates of 76% and 48% respectively.

    3) The difference between taxable income and broad income is tax avoidance (using the term in a technical not a judgmental sense). So D&S do indeed ascribe most taxable income elasticity to tax avoidance, as Reed says. (They’re quoting results from other papers, especially this one).

    4) None of these numbers is applicable to the UK, where both income distribution and elasticity are different.

  15. And have you seen the cuntish hypocrisy Murphy is displaying at the moment on the US based advisor paid by Labour?

    If Google (based in the US) supply services here in the Uk and pays no UK tax Murphy calls it egregious tax avoidance.

    When this advisor (based in the US) supplies services here in the UK to the Labour party and pays no UK tax then of course it’s OK according to Murphy.

    Cunty, cunty, cunty, cunt.

    As for the Laffer curve, hey Howard read a story about a bloke who won the lottery and carried on working so of course it is now Murphy says it is ‘beyond dispute’ that tax fiddling is the only reason for the Laffer effect. Christ how does he get away with it?

  16. These days there are also a metric fuck-load of high-earning foreigners in the UK, almost all in London or thereabouts. In many cases their presence here is a demonstration of the Laffer curve in their home countries, and they’ll move on to the next reasonably-taxed jurisdiction if our taxes get too high.

    In fact if America ever enacts a half-decent high-skilled migrant visa system, instead of the current fucked up H1B visa, many of them will be off in a jiffy and there’ll be no new arrivals.

  17. “So D&S do indeed ascribe most taxable income elasticity to tax avoidance, as Reed says.”

    But in Murphy’s world ‘tax avoidance’ is ‘tax cheating’ which can be ‘cured’ by new legislation and a vast army of HMRC staff. I very much doubt D&S’s view of tax avoidance is the same.

  18. “Reed’s argument that some people would carry on working even with a 100% tax rate is incoherent: yes, some people will work unpaid, but that doesn’t mean they want a notional salary attached to their labour, to be paid directly to the government.”

    Who does he think would be paying this notional salary anyway? 99% of people have stopped working, so they aren’t engaging in any meaningful paid economic activity. The government? With what tax receipts?

  19. Ironman

    A pair of more deranged individuals it would be hard to find. Utterly convinced their own research qualifies them as experts. Neither having any significant exposure to finance or the private sector. (I find it hard to credit that Murphy was ever a practising accountant – he is just too ignorant) As you say, a wide variety of fallacies dressed up as intellectual vigour. Blind assertion presented as ‘irrefutable’ evidence. Utterly shameless.

    It would be hard to forget the Maugham blog – I had never seen a blogger as totally unable to respond to even the politest criticism before resorting to ad hominems before. So much so he has never been back there since. More than any other piece that shattered his credibility beyond repair!

  20. “With what tax receipts?”

    But the government can create unlimited money, so doesn’t need tax. Why Ritchie is so worried about tax avoidance is unclear…..

  21. Well, yes, some people would work without pay, unfortunately that’s unlikely to be the people at the offie or the takeaway, so your citizens income is going to be worthless anyway.

  22. Glendorran

    You have absolutely nailed it! He gives speeches on the need to close the tax gap and goes onto Twitter saying you don’t need to raise tax to spend money. He argues tax avoidance gives the avoider and unfair competitive advantage over compliant taxpayers, buy will argue all day long that the incidence of CT is entirely, ENTIRELY on Capital.

  23. Note that in the U.S. there is state income tax. It ranges from 0% in a few states to marginal rates of over 10% in California. This has real impact on where many people live.

  24. It’s alright for you, Ironman – you probably know whether you’ve got a home to go to 🙁

  25. I used to be an IT consultant in those fondly remembered days of the Socialist utopia. Then Gordon introduced IR35 which had the potential of making 90% of my income liable to tax. Sod that for a game of soldiers. It is only recently that my total remuneration as a permie has exceeded the total tax I used to pay to the Inland Revenue. This I suppose makes me a tax avoider?

  26. “one of the things we know about the income effect is that married women are much less subject to the income effect than the substitution effect”
    Tin where is your empirical evidence for this?

  27. Pellinor

    The response LOL is used far too often online, but you have made me laugh so much my office thinks I’ve gone crackers.

  28. To add to what Gamecock said, there is also city income tax in NYC. And there are property taxes everywhere. And sales taxes in many states.

  29. @VP (I find it hard to credit that Murphy was ever a practising accountant – he is just too ignorant)

    When he sold out Murphy’s firm had 3 partners and 10 (or 12) staff. That’s barely above the level where you have taxi drivers and corner shops as your clients. I’ve worked in firms where sub-divisions of a unit within the tax department were bigger. A 3 partner general firm just doesn’t get exposure to anything complex in tax planning. Murphy appeared baffled a while back at the concept of spousal transfer of assets before disposal.

    But I expect if you asked him he’d know that the tips a taxi driver receives are taxable.

  30. As far as I remember they specialised in telling luvvies whether grease paint was tax deductible. a couple of them wrote the Artists tax handbook or some such for several years.

  31. @AndyC

    ‘But I expect if you asked him he’d know that the tips a taxi driver receives are taxable.’

    Ha ha very good.

    I wonder when he sold out whether he took advantage of taper relief (not being an accountant I don’t know if that applied to his sort of partnership, to be fair).

  32. Note Reed’s (unsupported) assertion that a non-zero tax take exists at a 100% rate is not a refutation of the Laffer curve. If a) the tax take at 100% is equal to the tax take at some lower rate and b) the tax take at some intermediate rate is higher than at these endpoints, then there is still a revenue-maximising point in the interval, by Rolle’s Theorem (subject to the continuity/differentiability constraints that make the existence of the maximum a little bit unsound in rigorous mathematical terms). He’s too stupid to know what he’s criticising or its theoretical underpinnings.

  33. Fucking hell, this man believes that people don’t change their behaviour when tax rates head towards 100%, yet he also believes there is massive and widespread tax evasion?

    How does he not see the obvious conflict there?

  34. I well recall several of my staff in some of the companies I have run in my time for whom pay (and by implication, therefore, tax) was not the key or even, in all likelihood, a significant motivation for their coming to work.

    I liked my work. I don’t think that pay was a key motivation in how I did my work. I did the job as well as I could because I liked it and I like doing a job well.

    However I have obligations. If people had cut my pay, I would have had to, regretfully, find work elsewhere.

  35. Pingback: Note on Laffer curves | Homines Economici

  36. BiCR

    It’s quite interesting that the falsity of the Laffer curve seems to be an article of faith among the righteous even though it is a self evident natural law. How many lambs can you take from the flock? How much rubber can you take from the tree? How many potatoes can you eat? In each case the answer is a curve with a peak. Take too much and there will be less next time. Take it all and there will be none next time. Also the Laffer peak is the point of zero growth, and therefore is to be avoided, not aimed for.

  37. @SMFS
    I would marginally (instead of my usual vehemently) disagree with you. Pay is not my main reason for working (the pension from from my former employer exceeds my earnings) but if I feel that someone is trying to rip me off, then I’m going to take my ball home (and the stumps and bails).
    @ theoldgreenfascist
    There is data somewhere about the breakdown of housold between husband’s earnings, wife’s earnings and other. There is data about the correlation between the rise in female participation in the workforce and the reduction in income tax rates. There is also the trade-off between paying someone to do your housework for you/look after your children for while you earn a middle-class salary and staying at home with (usually) less stress where the tax rate can and will tip the balance. *I* do not know where the comprehensive data may be – I suspect ONS has it but I shall go bald if I have to use their website too often.

  38. Tim has not been able ( or at least cared ) to reply to my post. Who is therefore the person who is pontificating on something he knows nothing about. Have you fucked up on this point?

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