Laffer Curve Effects

The strong version of the Laffer Curve, that all tax cuts always pay for themselves from increased revenue (over reasonable time scales) is incorrect. The weak version, that some do, is correct. Similarly, the strong version that all tax rises increase revenue is incorrect: the weak version that some tax rate rises will increase revenues and some will not is correct. Technically which is which depends upon the elasticity of this, that and the other. The more mobile the thing being taxed is (whether people or capital) the more likely it is that a rise in tax rates could actually bring about a fall in revenues collected.

We might be about to see this happen with the taxation of the non-doms.

Alistair Darling\’s tax crackdown on Britain\’s non-domiciled residents will end up costing the Treasury more than twice the sum the Chancellor expects it to raise, a new study has calculated……But the study warned that the non-dom plan will cost the Government £2.1 billion in lost tax receipts due to "capital flight", in which wealthy individuals leave the UK and take their money with them. Even the Treasury has admitted that 3,000 of the wealthiest non-doms could leave the UK as a result of the tax plans.

Other than the cry of "make the rich bastards pay" there\’s not really much to commend this plan if that is true. Now I agree, this isn\’t exactly the most impartial of all groups telling us this but what if it is actually true?

According to tax experts at the Society of Trust and Estate Practitioners, non-doms pay £7.16 billion in tax annually. The society has calculated that the departure of the richest would cost Mr Darling more than £2.1 billion.

Isn\’t that interesting. Those supposedly non-taxed non doms actually provide well over 1% of all revenues collected annually? And if we insit they pay more, we\’ll actually get less to spend on schoolsn\’ospitals.

Might be a good idea not to go ahead with this plan then, eh?

6 thoughts on “Laffer Curve Effects”

  1. “Other than the cry of “make the rich bastards pay” there’s not really much to commend this plan”

    But that was precisely the point of the plan. Socialists are Levellers, and since levelling up is not possible, they must level down.

  2. We’ll all be moor equally poorer. The financial handicapper general of the left must be happy.

    “Everyone is equal” chants the left in a prayer to their god, The State. It doesn’t make it true, but you cannot reason someone out of a position they didn’t reason them-self into.

  3. Why on earth are the Society of Trust and Estate Practitioners basing their assumptions on the “departure of the richest” non-doms?

    Since the proposal involves levying a £30k annual flat fee, its impact on anyone with an income over a few hundred K is going to be negligible. If it makes anyone leave, it’ll be the people for whom £30k is a significant proportion of their total tax bill…

  4. May not be an exact analogy, but in the USA it is not uncommon for those with very high incomes which are not location-dependent to move to other US States with lower tax rates when faced with (relatively small) increases in State income taxes.

  5. Tee hee! Is all I can say, altho’ John B has a good point – didn’t HM Treasury admit they had no idea how many non-doms there are and how much tax they pay? From our clients, I know that some are considering buggering off, so this is all quite possibly true. There again maybe it’s not.

  6. “Since the proposal involves levying a £30k annual flat fee, its impact on anyone with an income over a few hundred K is going to be negligible.”

    Because it’s not the £30K that’s the issue. It’s the “anything you bring in to the country will be taxed at 40%” that’s the issue. It’s the “your wife has to pay the £30K too” issue. It’s the “your offshore trusts will have to pay tax too” issue.

    You see, the Scottish Cyclops tends not to focus on these “minor details”, and so nor do the journalists. So they lie hidden, like a rake in the grass, until the non-doms hire some specialists who point them out. And make their decisions accordingly (e.g. not bring any art into the UK to loan to galleries since 40% of the value of Van Gogh’s finest tends to be a bit expensive).

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