I wonder if Ritchie has ever actually read a paper properly?

OK, so he does at least agree that there is a Laffer Curve now. That\’s something I guess.

However, he then brings to our attention this paper which leads to him making the following statement:

I but that: it accords with the world as I observe it.

So for all practical purposes the answer to the Laffer question of ‘will we increase taxes by cutting rates?’ is a simply and responding ’No’.

However, he\’s not bothered to read the paper, has he? He\’s relied on, Lord help us, Kevin Drum for his information.

And the paper actually shows that here in the UK we could well be above the peak of the Laffer Curve.

For what Drum and Ritchie are frotting themselves senseless over is this:

As an illustration using the
different elasticity estimates of Gruber and Saez (2002) for high-income earners
mentioned above, the optimal top tax rate using the current taxable income base
(and ignoring tax externalities) would be ? * = 1/(1 + 1.5 × 0.57) = 54 percent,
while the optimal top tax rate using a broader income base with no deductions
would be ? * = 1/(1 + 1.5 × 0.17) = 80 percent. Taking as fifi xed state and payroll
tax rates, such rates correspond to top federal income tax rates equal to 48 and
76 percent, respectively.

Woo hoo! Look! 76% for income tax is the peak of the Laffer Curve!

Ah, but, note how it is derived. By taking the top total tax rate, subtracting that which is not income tax and declaring that the remainder is what the top marginal income tax rate should be.

So, what do they calculate as being in that total tax rate?

The top tax rate ? is 42.5 percent for ordinary labor income when combining the top federal individual
tax rate of 35 percent, uncapped Medicare taxes of 2.9 percent, and an average combined state top
income tax rate of 5.86 percent and average sales tax rate of 2.32 percent.

In our case the taxes which need to be included are employees\’ national insurance (2% uncapped I think?), employers\’ national insurance (13.8% and yes, this does have to be included as the original includes the uncapped employers\’ side of Medicare) and the effects of VAT (20% at present).

So, on something like the current tax base (and UKites can, as we know, escape just by crossing the Channel so we actually have a narrower tax base than the US in that one manner) we\’ve an optimal top  tax rate of 54%. Minus the effects of VAT, NI, to give us the optimal top marginal income tax rate.

And as was worked out in the comments here that puts the UK\’s Laffer Curve peak at 40% for income tax.

Or, contrary to Ritchie\’s buy in, we would raise tax revenue by lowering taxes.

It is actually important to read the papers you refer to you know.

5 thoughts on “I wonder if Ritchie has ever actually read a paper properly?”

  1. To his credit, he has allowed through the moderation filter the comments I’ve made making those exact points.

    Conclusion is that actually the peak is about 35% if the methodology is valid and the elasticity is the same.

    (My thanks to PaulB for clarifying the specific deductions on Employer NICs).

  2. Dear Tim. You are doing an essential task in publicising the institutionalised wing-nuttery of socialism. Keep it up.

  3. Tim, the calculation giving about 40% for the optimum rate uses the 57% elasticity derived from empirical data in the USA. Whereas Murphy, via Drum, is using the 17% elasticity reported for “broad income” rather than taxable income in the USA.

    There are many more deductions available in the US tax code than in the UK, so I suggest that 57% is unjustifiably high. But of course I agree that 17% is unjustifiably low, so Murphy is wrong as usual.

    More at http://pb204.blogspot.com/2011/12/optimum-tax-rates.html

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