Polly and the Laffer Curve

Johnson dusts down the old Laffer curve – a long discredited theory convenient for the rich, suggesting lower tax brings in more revenue. But the IMF – no lefties – studying revenue-maximising rates finds virtually all countries could raise top rates considerably higher and bring in significant extra sums: the UK and the rest could raise their rates to an optimal 60% or more before they lose more than they gain.

The New Palgrave Dictionary of Economics, reviewing all the research, finds Laffer doesn’t kick in until about 75%. But don’t expect Laffer to disappear from the lexicon of bad reasons why the rich should pay less.

So the Laffer Curve is a long discredited theory but now we’ve got to have a discussion of when it’s true?

Even by Polly’s standards that’s pretty good, doncha’ think?

27 thoughts on “Polly and the Laffer Curve”

  1. It’s also a theory some of those with pretty meagre means (ie. me) put some stock in. But that’s neither here nor there as far as Polly’s, and the Guardian’s, agenda is concerned.

    I once made a semi case for the Laffer Curve on CIF and I promply branded a “psychopath”. I never did figure out that one.

    Baffles me people can discount human nature to this extent. The idea that the majority of people will continue to strive even though the state is gobbling up to 100% of what they produce is, to be frank, completely fucking bonkers.

  2. Isn’t it time that true liberals started moving away from talking about the Laffer curve anyway? If it turns out (as it might well do) that revenue-maximising tax rates are indeed higher than current rates that just gives the leftists more ammunition, not less.

    We need to bring the discourse back to whether tax revenue maximisation is the goal anyway. Why should it be? Surely the optimal amount of tax to raise is the minimum required to do whatever it is we decide the government should do?

  3. I do wonder if the left are the natural slave owning classes. It fits in with the notion you can keep whipping the slave when you want more out of him. Harder you whip, harder he works.
    It’s the only rational for the denial of the Laffer Curve*

    Caveat; This does not imply the position of the Laffer Curve can be predicted by economists.

  4. bloke in germany

    That was the point I wanted to make, but i think you’ve done it better than I could.

    I don’t really care if a man earning more this year than I will ever make in a year can ‘afford’ to pay more tax. I don’t want him to, because I’m not morally entitled to take more than half of what he earns. i’m not entitled to take more than, say, 40%. I’m not entitled to cast doubt on the way he earns it without good reason and certainly not entitled just to assume he must be corrupt simply because he has done well.

  5. Are changes in rates as or more important than the rates themselves? Particularly unexpected changes. I remember the shouts of joy (think the orgasm scene in When Harry met Sally) from partners at the law firm I worked at when they heard Lawson drop rates to 40%. They expected 50%, and would have been happy with that.

    (Not sure how much it incentivised them to work harder rather than enable them to retire earlier, but that’s another question.)

  6. When Polly attacks the rich, does she not realize that she also is rich? I wonder if she will have to pay the 50% rate.

  7. A proposal for Polly : let her donate her “under taxation” to HMRC. Does the ensuing feeling of smug selfrighteousness compensate her loss of net income? Or only when it’s inflicted on some entrepreneur?

  8. What I never understand is how those people see a laffer curve (although they dont realise, stupid is as stupid says) when it comes to raising the price of cigarettes or alcohol to reduce consumption, but somehow there would not be any effect on people and taxing their incomes.

  9. I think Polly uses the word ‘discredited’ in the same way the Left use the word ‘Refuted’, ie with no idea what it means. I must have read a thousand times someone saying they had ‘refuted’ something yet made no argument or proved anything to be wrong.

    So, I am refuting Polly’s article. There, simple.

  10. Contradictory Left-Wing Arguments #267:

    (1) The rich are all scumbags who won’t pay their ‘fair share’ to society.

    (2) We can whack up the rate of tax on the rich to as much as possible and we’ll see bountiful amounts of loot flow into the treasury.

  11. out of interest, Polly presumably pulls in income from a variety of sources; I wonder if someone with access to Companies House could run a search for her and see if she’s a director of any limited companies?

  12. monoi>

    Stupid? I think there’s ample evidence that Polly is not as stupid as she appears here, because she can (e.g.) dress herself in the morning, go potty without assistance, and so-on.

    Obviously, the alternative is that she’s maliciously dishonest, which fits perfectly with everything else we know about her.

  13. “the UK and the rest could raise their rates to an optimal 60% or more before they lose more than they gain.”
    45% Income Tax
    13% Employers NI
    2% Employee NI
    =60% (yeah, I know, not quite in reality, but damn close).
    So Polly agrees we are at the optimum. Excellent.

    That’s leaving aside the assumption that a tax rate should always be set at the rate that raises the most short-term revenue; regardless of any effect on jobs, investment, growth etc etc.
    If you follow that to it’s logical conclusion, just impose a 100% wealth tax on everybody; simply pass a law that the state owns everything. There, that’s trillions of pounds of revenue; the government is rolling in money, an end to the cutbacks and tax cuts for everybody. Hoorah.

  14. ‘Polly Toynbee holds 2 current appointment, has resigned from 2 companies and held appointments at 0 dissolved companies. Polly began their first appointment at the age of 47 and their longest current appointment spans 8 years and 6 months at BRIGHTON DOME AND FESTIVAL LTD.

    The combined cash at bank value for all businesses where Polly holds a current appointment equals £1,387,759, with a combined assets value of £2,713,133 and liabilities of £2,880,851. Roles associated with Polly Toynbee within the recorded businesses include: Director ‘

    Tee hee:

    ‘The combined cash at bank value for all businesses where Polly holds a current appointment equals £1,387,759, with a combined assets value of £2,713,133 and liabilities of £2,880,851.’

  15. CoyoteBlog recently made a point about minimum wage increases that probably applies to tax increases.

    It’s hard to measure the impact of a minimum increase because employees get unhired not only on and after the wage increase but sometimes more than a year in advance in anticipation of the increase.

    The same surely must hold true for tax increases. Business starts going Galt as soon as socialists get elected, it gets Galty-er when they announce their crazy plans and by the time the plans go into effect I an all the other Galts are on the beach in a tropical place out waiting them.

    Those of us with money suffer very little, we often enjoy the hiatus. Mexico. Beach, mmmmm, another Pacifico por favor.

    As usual it’s the small guys we don’t hire who take the socialist kick in the shorts.

  16. What Polly wants to say is that it is discredited that the peak of the Laffer curve is below the current 45% so an increase will reduce and a decrease will increase tax revenues. However she fails to notice the difference between saying that the Laffer curve has a peak above 45% and that the Laffer curve does not exist.
    She thinks that top rate should be at 60% where Geoffrey Howe set it. Thatcher-era taxation rates!
    Tim,. please can we have a headline “Polly Toynbee says Thatcher and Howe were right”?

  17. Simple logic. The Laffer max is the maximum tax rate that can be imposed before revenue starts to decline. Revenue declines because the economic activity you are taxing shrinks. You’re taking a larger slice of a smaller pie. The Laffer max is then the maximum tax rate you can impose before the economy starts to shrink. And the point just before growth goes negative is zero.

    However, I understand your skepticism, I have never seen this stated anywhere. I can’t see how it can be wrong, though. Can you?

  18. Roue le Jour – I’m not an econiomist, but I think you have that slightly wrong. Any tax will shrink the economy slightly: the Laffer maximum is where the effect of shrinking the pie outweighs the effect of taking a propotionally bigger slice. Or: it’s the maximum tax rate before the economy starts to shrink *too much* to be desirable if you want to maximise tax income.

  19. I don’t think so, Pellinor.

    Tax revenue = tax base * tax rate.

    If you increase the tax rate and the revenue falls it is because the base has shrunk.

    The maximum revenue that can be sustainably extracted is the the largest rate that will not cause the base to shrink.

    Zero growth.

  20. Polly can caim Rolle’s Theorem is discredited, or that some of the underlying assumptions are incorrect (notably differentiability of the rate/revenue curve) but the likelihood that an Arts faculty dropout like her is capable of that is vanishingly small.

  21. Well it’s slightly more complicated than that, since with higher taxes mores stuff moves into the grey or black economy, and to the extent it doesnt greater efforts are made to legitimately reduce tax exposure, where under lower tax rates people might not bother hunting down every deduction they can possibly claim.

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