Ritchie Rides Again

Mr. Murphy really does come out with some unbelievable statements:

There is however considerable concern that over very small bands of income the top marginal rate of income tax in the UK will in 2011 be 60% about which they say this:

raises the concern as to whether the projected increased revenue will materialise

Or in other words they raise the implicit threat that they will seek to subvert the will of Parliament through tax avoidance.

Umm, no, that\’s not actually what is being said.

We know very well that tax rates change peoples\’ behaviour. That\’s why we stick taxes on fags and booze: so as to change peoples\’ behaviour. That\’s why we tax petrol so highly, why we levy potential taxes upon criminal behaviour (the expected cost of breaking the law is the likelihood that you\’ll get caught times the fine or gaol sentence you\’ll pay if and when you are).

We know absolutely that taxation changes behaviour.

Now, it is true, that it depends upon which tax and which behaviour. I\’d wager that you could stick a £100 a shag tax on married couples and that…. well , actually, with married couples maybe behaviour would change. On unmarried couples then, and would the number of hook ups change all that much?

Or you could tax unmarried hook ups as Saudi Arabia does, with the death penalty. That they do actually execute people for this shows that the tax, while I assume that it reduces such behaviour, doesn\’t make it extinct.

Or we could look at economic activity. We know that, as Richard Layard has pointed out ad nauseam, that if you subsidise something like unemployment then you will get more of it. If you tax something, like work, you will get less of it.

Now with work it gets a little more complex, because there are two effects. People tend to have a minimum income that they will work all hours to get to. Above that, they\’re happy enough to trade leisure for income. Sticking a tax in there has different effects dependent upon whether they have reached this minimum or not.

A tax on income will, for those below their required minimum, lead to more working for money. For those over it, it will lead to greater consumption of leisure and less working for money.

Now, having set the scene,. we have Ritchie\’s assertion. That if marginal tax rates go to 60%, then any shortfall in tax collected, from the projection of unchanged behaviour,  must be because people engage in tax avoidance.

What, like a 60% marginal tax rate might not cause some people to preferentially choose leisure to those extra hours in the office? This is now tax avoidance?

Playing with the kids instead of burning the candle at both ends? This is subverting the will of Parliament?

Now, it is true that the effect of 60% marginal rates is unknown. It could be that those affected by these higher rates, the already high earners, will work harder. It\’s also true that in reality, some will and some won\’t. The effect upon tax revenues is determined by how many do and how many don\’t. No, I don\’t know any better than you do.

But I am absolutely certain that people deciding their own work life balance in the face of changed marginal tax rates is not evidence of tax avoidance nor is it evidence of subverting the will of Parliament.

Unlike Richard Murphy. The man really is a fool, isn\’t he?

Has he never heard of dynamic analysis of tax rate changes? Or think it all to be some right wing plot?


15 thoughts on “Ritchie Rides Again”

  1. Silly old you, Tim.

    If parliament decrees that people should pay more tax, of course they must pay more tax. Anything else is subverting the will of the people.

    This means, of course, that hard working people must work harder, so that the idle and feckless don’t have to work so hard.

    It’s all there in ‘Atlas Shrugged’, which is doubtless why that book is currently selling like hot cakes.

  2. Whilst most certainly agreeing that Murphy is a fool, and much worse besides, there is some evidence, persuasive at least, of the dynamics of moving from 40% to 60%. The same move, albeit in reverse, is what happened in 1988.

    It is noteworthy that, yet again, he is prepared to criticise his own professional body. Being a mouthy gobshite is one thing but he is seemingly not able to take the only meaningful gesture in this regard, and resign his membership.

    The membership subs he saves could be donated to charity if that makes him happy.

  3. There’s also the moral point that if Parliament decrees that someone should forfeit, at the margin, three fifths of the compensation for his labour, then its will bloody well should be subverted.

  4. The WGCE’s views are entirely consistent with the doctrine of the Left: we are owned by the state, and those refusing to work to the best of their abilities are subversives. It’s not much more of a leap to imagine prison for those not making their tax quota without good reason. And from there to gulags (due to the vast increase in prison places required).

  5. All good stuff, apart from this:

    That’s why we stick taxes on fags and booze: so as to change peoples’ behaviour. That’s why we tax petrol so highly…

    That’s why they say they do it, but the real reason is that demand for those things is price inelastic, so duties thereon actually don’t change people’s behaviour very much at all.

    The killer is VAT that is a duty on most things that the private sector provides, the demand for which is much more price elastic (or certainly far more than for fags, booze, petrol), ergo, VAT does have a massive distorting/depressing effect on behaviour, demand and hence output (and is a thinly disguised tax on turnover and hence on profits/employment).

  6. Would Murphy burning time writing his dreadful blog be considered tax avoidance?

    Or would my time spend avoiding Murphy’s blog be considered tax avoidance.

    If Murphy stopped writing and I stopped reading what he didn’t write, would that lead to a substantial reduction of the deficits on both sides of the pond?

    Or what?

  7. If youse were in the public sector and found your 40% tax changing to 60%, wouldn’t you just get yourself a pay rise of 20% so you end up taking home the same money for the same amount of work?

  8. Mark,

    You need a 50% increase of the money you currently pay 40% on, e.g. if you pay 40% tax on 10000, you’ll need an extra 5000 to keep the same amount, which will actually be a bit over 10% of your total pay.

    I actually believe that it is morally wrong for the state to take more than half of what you earn in taxes, and I mean all taxes, and would feel perfectly justified in doing everything I could to prevent it from doing so. People might argue that if parliament decrees it then it is the will of the people but, aside from the fact that governments are not elected by a majority, one is getting into tyranny of the majority territory.

  9. Personally, once I’ve reached the 40% threshold in any given tax year, I don’t look for any more work.

    Does that answer anybody’s question?

  10. Not only do taxes reduce the incentive to work in themselves, but I actually enjoy not being paid just because it means twats like Murphy can’t steal my money.

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