Such a threat, such a threat

The event was on the economy and Brexit and covered a lot of ground but I began talking about the UK as a tax haven which we are led to believe is Philip Hammond’s Plan B. I explained why this was a terrible idea roughly following these notes:

Tax haven UK
The threat
To turn the UK into a low tax nation

What’s wrong with being a low tax nation? OK, sure, it’s a political choice. 35% of GDP running through government, 45%, that’s (with the usual exception of France) about the spectrum for European countries. Shrug, being at one or the other end of that is indeed just a political choice, it’s not a threat.

Will it work?
No: there is no evidence low tax rates boost investment, productivity, employment or growth
In fact they tend to discourage investment because the tax incentive to spend is reduced

A professor of international political economy said that? Seriously, that’s entirely contrary to all of the economics on the point. It’s possible to make the argument, and for certain public goods even I would stoutly maintain that that argument is correct, that government deployment of the tax raised produces more wealth that the pocket leaving fructification. But we still do have those deadweight costs of the tax raising itself, they don’t go away just because the spending is upon something nice.

And the Laffer effect?
That kicks in at tax rates well over 50% and we don’t have those
So this is a tax giveaway

No, Laffer Effects exist all the way up and down the tax curve. That’s the point, it’s the Laffer Curve after all. It’s the peak of the curve which is over 50% – 54% according to Diamond and Saez. Which is all taxes upon income, not income tax and when we add employers’ NI (which Spud will readily agree is incident upon the employee) to income tax we get to around and about that rate.

Sigh.

41 comments on “Such a threat, such a threat

  1. Tim’s posting here set me thinking more about the Laffer Curve WRT income tax, and particularly that 54% (which I assume is the marginal rate).

    As I understand it, the Curve defines the point (its peak) at which the tax rate is so high that people give up working (so hard); thus the total tax take falls. Government has less tax coming in, and suffers directly from this – with presumably near immediate effect or certainly active effect in the short term.

    Let us not forget, however, that the totality of tax take and the totality of government ‘share’ of the economy has effect. This is (largely if not totally) through government making worse decisions on investment and on spending than does the free market.

    I was wondering about the equivalence of government to the mafia. Income tax is a bit like the protection racket business: you need the ‘taxed’ businesses to stay in business. The totality of mafia business is a bit like government: they spend too much on the wrong things, such as bribing law enforcement, the protection racket enforcers having ‘free’ access to the brothels, even the cost of keeping two sets of accounts. [Aside: the government’s second set of accounts, IMHO, is all that effort persuading the public that government policies have value – when the free-market public would have chosen totally different uses for their own money, given half a chance.]

    So, the Laffer Curve helps THE GOVERNMENT keep their ‘protection racket’ within bounds beneficial to government. But the Laffer Curve is not actually a justification for any of that government expenditure!

    Best regards

  2. Here’s a question for those intrepid souls who have read one of the Prof’s books: given his ability to be wildly inconsistent between one blogpost and the next (and indeed sometimes within the scope of a single blogpost) how successfully does he string together enough material to fill an epic like “The Joy of Bollox” without major semantic and logical fisticuffs?

  3. @Nigel Sedgwick

    Personally, I’ve gone beyond the Laffer curve peak. I’ve written some iPhone games and they bring in a steady stream of sales. But, about 20% gets taken in sales tax, then Apple takes 30%, then the UK government takes 20% corporation tax, and then 32% dividends tax.

    I can live comfortably on what’s left over and ends up in my pocket, but I struggle to gather the willpower to bother doing any more work when I know how little of the extra sales money I will end up getting. I’m considering moving to a beach and taking up drinking alcohol as a living instead.

  4. Nigel, the great man would foam at the mouth at the idea the state invests less efficiently than the private sector.

    I have suggested to him (before being banned) that he gets a job in the public sector to see it for himself, but he won’t. He is frightened of having delusions shattered.

  5. In the Fat Prof’s world, tax is everything. Why would anyone work if they did not enjoy the opportunity to pay tax? Companies only invest so that they can pay more tax.

    Candidly, Sean, you are lying.

    Tax can never be a disincentive

  6. Nigel Sedgwick, what you want is the Rahn Curve.

    Laffer shows the tax rate at which the government gets the most money; Rahn shows the tax rate at which the country overall gets the most money (maximised GDP growth).

    The peak of the Rahn curve is significantly to the left of the Laffer curve; government spending somewhere around 20% of GDP.

  7. > because the tax incentive to spend is reduced

    That’s a brilliant Murphyism. Companies only spend money in order to try to reduce their Corporation Tax bill; if we didn’t have CT, they wouldn’t spend any money, and the economy would collapse. Therefore MOAR TAX = bigger economy.

  8. Indeed, Andrew M. I suppose one could construct a government where tax implications were paramount. If so, no one would be investing there, anyway.

  9. The argument about Broon’s 50% tax rate and the affect on wealth creation never seemed quite right to me.

    Are there many entrepreneurs on salaries of 150k plus?

    I would have thought that was mainly decently sized Corporate Fromages, and top Guardian columnists.

  10. Here’s a question for those intrepid souls who have read one of the Prof’s books: given his ability to be wildly inconsistent between one blogpost and the next (and indeed sometimes within the scope of a single blogpost) how successfully does he string together enough material to fill an epic like “The Joy of Bollox” without major semantic and logical fisticuffs?

    Short answer: He doesn’t.

    All you need to write something like “The Joy Of Tax” is a very small brain and the willingness to use it.

  11. One has to look at total tax rates as well as marginal tax rates to get the full picture, so for example someone earning £40k may well pay 20% on £30k but nothing on £10k, so their percentage might be 20% marginal, but as 20% of £30k is £6k, their overall rate is 15%. You have to be well into the NHS manager rates to approach 40% overall. Add in NI, and it is difficult to see that 20% + NI is all that different to 40% above the threshold. More to the point, employer NI is a fraction of your salary taxed at 100%.

    All of this before you live somewhere or buy anything. Even things notionally tax-free like food are produced and delivered by taxed operators which contributes to their cost.

  12. Nigel Sedgwick

    There was an excellent piece in the Salisbury Review entitled ‘ Mafia or Marxilogue’ which contrasted the Extreme Left and organised crime. In most cases Organised crime usually caused significantly less long-term disruption than Stalinists like Murphy. The premise of the Mafia being that if one is fond of golden eggs, killing golden geese probably is not the best idea whereas Murphy would assume that the goose can be given to the state, sterilised and worked until it dropped. My own experience of organised crime (which I admit is limited) would tend to support this hypothesis. Certainly Murphy’s ideology, on a collective level is a far greater threat to the UK’s prosperity than the various organized criminal syndicates are.

  13. Malcolm X said that the numbers racket in NYC paid out more than government lotteries.

    ‘Today, many state lotteries offer similar “daily numbers” games, typically relying on mechanical devices to draw the number. The state’s rake is typically 50% rather than the 20–40% of the numbers game.’ – Wikipedia

  14. Say what you like about how the Mafia used to do things, they kept control of their people. When ordered to do something they would, however ones who did stuff the boss didn’t like…. were not released from jail 6 weeks later.
    Mafia system was closer to Feudalism in an area rather than the modern idea of democracy.
    And a lot cheaper to run.

  15. “Tax can never be a disincentive”

    I beg to differ, given I fell into the 60% marginal tax hole (100-120k if memory serves) a few years back, and have subsequently made damn sure I didn’t do that again………………

  16. Jack C,

    > The argument about Broon’s 50% tax rate and the affect on wealth creation never seemed quite right to me.

    Depends on what you mean by “wealth creation”. At the simplest level it means “doing work”.

    Let’s say I’m a successful self-employed male model. I charge clients £626 a day and I work 180 days a year. My gross salary is exactly £100,000.

    One day, while I’m holidaying on the beach in the company of some female models, an agent calls to offer a one-day shoot at my standard rate. Taking into account the tapered withdrawal of the personal allowance above £100,000, I would only pocket £209 for the day (whereas the last day before hitting £100k, I took home £319). I swiftly tell my agent where he can stuff his offer, and return to sipping my Piña Coladas with Ingrid and Chloé.

    > Are there many entrepreneurs on salaries of 150k plus? I would have thought that was mainly decently sized Corporate Fromages

    Big companies are the ones doing most of the actual innovation and wealth-creation. For all the talk of startups, most small businesses are basics like dry cleaners and kebab shops, not Dyson or Google.

    Jim,

    > I fell into the 60% marginal tax hole (100-120k …

    It’s even worse if you include both types of NI: the marginal rate is 66.6%. See figures above. Contributing the excess to your pension swiftly alleviates the problem.

  17. I too did not know about the Rahn curve.

    I wonder if we could hope that Richard W. Rahn of eponymous curve fame might one day make a comment on TRUK?

  18. Cynic, it’s not very well known; I’d met the man before I knew about his curve.

    But Tim, I thought you’d written about it. I must be mixing you up with a Dan Mitchell column.

  19. Snort, be serious, I’m a hack. Even if I have written about it that doesn’t mean I know about it……

  20. True, true.

    I had a drink with Rahn last week, which is probably why his graph came to mind. It’s a good idea, pity it hasn’t become as well known as Laffer because it recommends lower tax levels – and a smaller government – than Laffer does.

  21. The Meissen Bison
    To address you r question on Murphy’s inconsistencies within one, er, book we can turn to David and Samantha Cameron. According to David they discovered it had “69 different position, none of which worked”.

  22. Thanks to Richard and Cynic for info on the Rahn Curve.

    It’s obvious that such a thing must exist (as a mono-modal plot): eg no law and order at one end and communism at the other. But I was not previously aware of the name, nor of the more detailed analysis that goes with it.

    Best regards

  23. Would a rational tax policy be to operate at the peak of Rahn during BAU, while reserving peak Laffer only for short term emergencies (war)?

    Assumes you have a decent idea of the shape of each curve.

    And a sensible definition of emergency. That bit wouldn’t be easy.

  24. It does rather strike me that faster growing economies are more at the Rahn optimum than larger more “developed” economies. This may be because at the smaller end the aim is to get everyone’s income to increase a la Thatcher. At the larger, wealthier, end we have significant numbers of people who care about equality of outcome so the state organises itself around that goal, which is better served by the Laffer optimum as it maximises the potential for redistribution.

    I knew about Laffer but the rest is new to me, except the >60% marginal rate effect. I turned a promotion down once as the extra hours and the firm push into the 60% zone meant I would have an effective pay cut. Nowadays you can only put so much into your pension per year so options to avoid the tax are shrinking. There is always leaving the UK though…..

  25. I think care is needed here. My understanding is that the Laffer Curve (on income tax, including NIC) is the marginal rate of taxation that each taxpayer ‘suffers’. This differs with total income in a graduated tax system; the pain/action threshold (eg not working overtime, not seeking promotion or a higher paying job) may well differ with individual income level – even on average. For the Rahm Curve, it is the total taxation by all levels of government as a proportion of GDP.

    In addition, as Cynic suggests, emergency taxation (in time of war) should very sensibly be at levels that would be expected to reduce the total tax take. However, war is more normally (substantially) funded by government borrowing.

    Best regards

  26. There’s a Lynn and Verhanen study from around 2001 which indicates intelligence and a free market economy are the strongest correlators with prosperity. This conclusion ( which could be false, who knows ) gets round the question of why the Nordics are happy and successful economies.
    Targeting taxes as a % of GDP would be a red herring based on their study.

    Making the economy more free is easy, but raising IQ is a long term slog. The limit of 2 children on new child tax credit claims from next month might have the unintended effect of raising the average though.

  27. Let’s say I’m a successful self-employed male model.

    Well yes, but you wouldn’t be salaried.

    Broon was playing a political game, so was Wrong for that reason alone.

    However, I doubt a CFO on 175k would work less hard. More likely, they’d just look for an extra sum in pay or perks. Or put up with it.

    Of course, trousering only 209 from 626, as per your example, is criminal (on the part of the government).

  28. Yeah, war wasn’t a great example. Possibly WW2 type, which I was thinking of at the time, as you’d maybe go peak Laffer plus borrow like crazy. Not do much Soviet 14-days-to-the-Channel though.

    Fair point about marginal taxes. When I reached that point of marginal improvements to lifestyle combined with a dwindling cut of the rewards of labour, I said bugger this and concentrated on making the same job less stressful instead.

  29. “However, war is more normally (substantially) funded by government borrowing.”

    Murphy’s Magic Money Tree in most cases, e.g. Germany and Austria in WW1. Their currencies were fucked before Versailles and the Ruhr occupation even began.

  30. “Andrew M

    Contributing the excess to your pension swiftly alleviates the problem [of the 60% marginal rate]”

    Ah, but there’s all the proof the Murphatollah needs to condemn pension tax relief. By not taking away something from you, the state has in fact given something to you (so he says).

    Which is a bit like saying that if the government habitually cut off both little fingers off everyone’s hands but then decided to only cut off the little finger of your left hand that the government had given you a finger.

  31. It looks like another “mind map” is on its way.

    Is it possible to locate admission numbers by discipline and university for the UK?

  32. Apparently he thinks that if you break the tax up and hide its total in innumerable little ‘fees’ and ‘fines’ and whatnot that people won’t notice that you’re taking over half their dosh and change their behavior to compensate.

    Sadly, he seems to be half-right – they certainly don’t notice who is really taking their shit. Its all the fault of the corporations.

  33. “, but raising IQ is a long term slog. ”

    So importing millions of Pakistanis who have a cultural practice of multiple generations marrying their first cousins, with the corresponding drop in IQ, is a bad idea then?

  34. “Richard
    pity it hasn’t become as well known as Laffer because it recommends lower tax levels – and a smaller government – than Laffer does.”

    I think this might be because the Rahn curve puts a limit on the ‘socially maximal’ government size – and the people invested in government don’t care about that – while Laffer shows a limit that is more akin to a physical law.

    And think of all the people and all the effort spent denying the Laffer curve exists.

  35. ‘The limit of 2 children on new child tax credit claims from next month might have the unintended effect of raising the average though.’

    It is a political policy designed to appeal to certain voters, these voters don’t quite understand that with a falling fertility rate the cost of employing someone to wipe their backsides when they get old will cost them the houses they live in.

    The unintended consequences will be that third and fourth children (which only make up 15% of all families) will agitate for harsh euthanasia and inheritance taxes.

  36. Just to follow up on my above post, the 66.6% marginal tax rate over £100,000 is about to get even worse for some people.

    If you have a child aged 3-4, from September you’ll be entitled to 30 hours of free childcare, worth approx. £5,500 a year. But if either parent earns over £100,000, they are automatically excluded from the scheme: no tapering, nothing. So for my male model alter ego (with young child in tow), instead of pocketing £209 for the extra day’s work, he now loses over £5,000.

    Again, for male model you can substitute any job where extra work is paid. If you want to grab the Guardian’s attention, point out that it’ll hit GPs and hospital doctors. Which is most unfortunate, as the people behind our tax & benefit systems clearly need to have their heads examined.

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