Finally, we actually get a reply to the question.
How does Richard Murphy make his sums work about how much revenue will be raised by increasing the tax rate on the top decile of families by 60%?
Good to note you agree the tax could be raised
Your only query seems to be how much tax is raised
Your way of expressing this is to question our assumption on elasticity
For reasons we have given – and which iI have explained here – we think there will be behavioural changes – which may result in more, not less effort
I think there may be a greater demand for work – for example from the second partner in a high earning household that will – in accordance with all observed social behaviour – including the wish to ‘keep up with the Jones’ or to simply pay the mortgage – which is widely ignored in the blackboard economics you favour developed, rather oddly, by economists who have never worked in a market in their lives
That pressure to earn more to cover fixed obligations will, I (we) think counterbalance any tendency to reduce work
Leaving the outcome we predict
And of course we may be wrong
But that’s our prediction
And I stand by it
The effect of any tax change upon revenue is (amongst other thing but these are the two relevant ones) determined by the following.
1) How much people target their post tax earnings as the determinant of how much they work. If people have a number, \”x\”, that they desire, if you tax them more will they go out and work more to get to that post tax \”x\”?
2) How important marginal tax rates are in setting incentives. Do you offer to do more work if the Government is getting 30% of your marginal income or 75% or your marginal income? At what point do you trade more leisure for that decreasing percentage of extra income that you get to keep?
There is really no firm answer to either of these questions. Different people will react differently, the same people will react differently at different times. It is also true that the short term and long term effects are likely to be different. Someone locked into a current spending pattern (say, a particular mortgage, or some number of kids at private school just as examples) may well find that 1) is the appropriate response. However, the same person over time might reorganise life leading to the second effect becoming more important. Trade down the house and take more leisure for example.
(I\’m not sure if I\’ve got this quite right but I refer to those two as the income and substitution effects. Might be me garbling the jargon though….update….and I have, a bit, but not badly enough to affect the argument.)
The nett effect of any tax change is going to be the sum of these two effects.
Richard is assuming in his calculations that the income effect will predominate. That (vastly) higher tax rates will lead to an increase in work and thus an increase in revenue over and above a straight line calculation of that tax change.
That, it has to be said, is an extraordinarily brave assumption to be making. I certainly wouldn\’t want to have to try and defend it. And, sad to say, nor really does Ritchie. He\’s muttered something about the Treasury being allowed to see the sums but not anyone else.
What I do love though is the arrogance of the suggestion that \”blackboard econmoics\” of the type I favour doesn\’t consider such matters.
Gosh, lookee here!
Supply of labour in the short-run: choice for the individual between income and leisure,
including the backward-sloping supply curve.
It\’s part of the A Level economics syllabus. Well, fancy that, I guess \”blackboard economics\” really does ignore such things!
Update: One more thing here. Ritchie is specifically expecting the second part of a household to take up extra work (ie, married women for the most part). But we know that married women are \”more\” sensitive to tax rates than either the single or men. Thus whatever the effects of raising tax rates are generally on either of the two effects, we know that for married women the subsititution effect is stronger than it is for others.
Which really leads us to the conclusion that the specific effect, more married women going out to work as a result of higher tax rates, that Ritchie needs to make his sums balance just ain\’t gonna be there.