I know I keep pounding the point that at American levels of taxation, the Laffer curve promise of higher revenue on lower rates doesn\’t apply. Well, at 55%, it\’s plausible to believe that it *does* apply. There is a limit to how much you can raise taxes on the rich.
There\’s an interesting if underappreciated point here I think. There\’s two ways in which raising tax will reduce revenues. Or, sorry, possibly could, if we engineer things to move to the right of the peak of the Laffer Curve.
1) All of the usual stuff: if the marginal tax rate is 55% or 75%, then people will simply substitute leisure. Or instead of making high risk high return investments in equity, make low risk ones (tax free municipals look pretty good at high rates of income taxation, like, say, the 98% the UK had on investment income). In short, people will stop doing productive stuff.
2) People will bugger off and do their productive stuff somewhere else. Why pay 60% in the UK when you can pay 13% in Russia or 0% in Monaco?
OK, those are actually both pretty obvious, at least from the European view. But 2) rarely comes up in US discussions of such things. Because, you see, under US tax law, you don\’t get out of paying Uncle Sam (you do get out of State taxes, but not federal) by moving to another country. Unlike most, in fact I think all, other countries in the world, you\’re taxed as a US citizen, not upon where is your residence. So as this ability of US citizens to decamp to Switzerland to avoid the taxes doesn\’t exist (except by giving up citizenship and believe me, the US makes this more difficult than any other country as well) the American debate about the peak of the Laffer Curve concentrates solely on 1).
Whereas, from what I can see, the European one concentrates on 2).
Which leads me on to a favourite annoying little point of mine. There\’s no such thing as "The Laffer Curve". There are a series of them. Depends upon the person, the tax and other bits and bobs associated with the situation. Sure, we can aggregate the population\’s responses to the level of any given tax: but if we forget, in the case of income taxes, those two different ways in which the take can fall, then we\’re going to end up with our presumed peak of the curve in the wrong places.
Now if we make the (gobsmackingly, awfully, wrong, but it\’s to clarify) assumption that the reactions to 1) are the same worldwide we are then left considering only 2). How easy is it for the high earners to flee the tax jurisdication?
For those in the UK, very simple indeed. For those in the US, near impossible. Which leads us to the fact that the peak of the Laffer Curve in the UK is shifted leftwards from the one in the US. Another way of saying the same thing is that the revenue maximising tax rate in the US is higher than it is in the UK.
Of course, I would argue that this means the UK rate should be lowered but I\’m aware that there\’s thems who would argue differently.