Well done, well done here

A new academic journal paper has something pretty interesting to add to the debate on the impact of higher than currently normal top rates of income tax. In their paper entitled ‘Top marginal taxation and economic growth‘ Santo Milasi and Robert J. Waldmann argue that there is a positive correlation between high rates of economic growth and high marginal top rates of tax. In their opinion:

The [estimates] suggest that the marginal effect of higher top tax rates becomes negative above a growth-maximizing tax rate in the order of 60%.

You knew that Richie was going to pounce upon this one, didn’t you?

Sadly, can’t see the paper itself. But it would be interesting to know whether they really mean income tax or taxes upon income. For Diamond and Saez find a not dissimilar result, a few percentage points away, for taxes upon income. Including, they insist, employer paid taxes upon employment etc.

But what’s really fun from Snippa is this:

The finding is, of course, entirely logical. We have known for a long time that the so-called Laffer effect, where higher rates of tax supposedly reduce effort, does not kick in until rates are sixty per cent or more.

Ah, good, so we do now all agree that the Laffer Curve is correct then. We’re only arguing about the rate, not the existence. That is an advance, isn’t it? And NB again, D&S tell us that it’s 54% for taxes upon income, in a system which contains allowances. Which, when you take NI into account, comes to an income tax rate of 40 – 45%. Which is also where the Treasury says the peak of the curve is.

BTW, allowances includes such things as being able to reside outside the taxing jurisdiction. Something the EU insists we all can do.

At which point, the giggles:

And we know, as a rule, that higher rates of tax encourage effort over observable ranges as people work harder to achieve net incomes given that the whole of our economy is geared to consumption, rightly or wrongly. Add the two effects together and the effect that this paper observes is the logical consequence.

Err, no, we don’t know this as a rule. In fact, if this were the rule then there wouldn’t be a Laffer curve at all. For if we all did target our net income then the higher the tax rates the more labour would be on offer to make up for the tax bite out of that desired income level. A 90% tax rate would see us all working 100 hours a week as we desperately tried to still afford a crust.

This does not happen. Therefore the assertion must be wrong.

And it is wrong of course. For the basic analysis which leads to that very Laffer Curve is that there are two different processes at work. One is the income effect, which is that very idea that we’ve an income we want and we’ll work to get it. Tax rates go up, we work more to hit that net income. On the other hand there’s also the substitution effect. If I’m only going to get 5% of my next hour’s work, a quid, fuck it I’m off fishing.

It is the interplay of these two effects which produces the Curve. We all, a little bit at least, work to the income effect, we all of us, a little at least, work to the substitution effect. The balance of the two changes as tax rates and incomes change. That’s what produces the Curve in the first place.

We cannot, therefore, point to the income effect and conclude that it proves Laffer wrong, because the income effect is one of the two things which produces the very curve.

Finally, how goddam ignorant does an economics teacher have to be to ignore that going fishing is consumption, the consumption of leisure?

Update: And reading the paper (thank you to DIAM who sent it to me) it does indeed seem to be looking at taxes upon income, not income taxes. Which rather neatly disposes of Snippa, doesn’t it?

15 thoughts on “Well done, well done here”

  1. Typical spud. An academic paper that agrees with him is genius. One that disagrees with him is neoliberal trolling.

  2. When my father’s business had good years he paid a horribly high marginal rate of “taxes upon income” by virtue of income tax, Super Tax and God knows what. The detail is unknown to me; I was but a lad. The gist, however, remains clear: rather than work his socks off to expand the business, he explained, he’d play a bit more golf.

    I imagine he preferred it to fishing because it was more active and more sociable. And, where we lived, it was all too possible to feel that one had eaten quite enough salmon and trout, thank you.

  3. Found in an old Telegraph article, the tax rates to warm the potato’s heart:

    Under Labour in the Seventies, the top rate of income tax rose to 83 per cent and reached 98 per cent when an investment income surcharge was applied.
    But while Healey is often remembered as the villain of the piece, it was Roy Jenkins who raised taxes on income to an all-time record of 136 per cent.
    These penal rates were imposed on high earners during the 1968 economic crisis as a special income tax levy for one year only on “unearned income” or savings and investment returns.

    Bob Rothenberg, of accountants Blick Rothenberg, said: “People really did pay more than £1 tax on £1 income on some of their investment returns because the surcharge was announced retrospectively.”

    And if you saved some of your income the bastards would swipe a chunk of that with whatever death duties were called at the time. Healey imposed a retrospective increase in death duties in 1974-5.

  4. “a growth-maximizing tax rate in the order of 60%”

    Is “growth-maximising” correct? Because there are two different things:
    – the revenue-maximising tax rate (the most money for the government), i.e. the peak of the Laffer curve; and
    – the growth-maximising tax rate (the most money for the people).

    The growth-maximising point is at a lower tax rate than the revenue-maximising one (although not necessarily much lower). Has to be, because once you pass the growth-maximising point there’s then a range where the growth curve is only dropping slowly, so increasing taxes still brings the government more money (a bigger slice of a smaller pie), before the growth curve starts going down too steeply and tax revenues fall too.

    If this new paper is saying that the growth-maximising tax rate is 60%, then they’re saying that the peak of the Laffer curve is actually (a bit) higher than that.

    Or are either the authors or Spud unclear about what they’re actually talking about?

  5. Interesting point in the papers today. Evidently cruise ships are full of people who are keen to keep their turnover below the VAT limit. They shutter their business and take a holiday instead. Goodness knows how much economic output the country is losing.

  6. “Rights are not subject to statistics.” – GC

    Thanks dearieme for putting the light of reality on this esoterica. Taxes are government taking real money from real people, ultimately at the point of a gun. Real people have no direct stake in growing the economy, nor maximizing placement on the Laffer Curve. You take $10,000 from me and tell me that shit and I’ll tell you were you can go rot.


    In a democratic government, we have the vast majority of the voters NOT paying taxes. Creating an absurd situation. The ancients warned that democracy would only last until the people voted themselves a raid on the treasury. We have done more than they knew possible, filling the treasury with IOUs, and now taking vast sums from the most productive.

    It is obscene. A flat rate income tax is the only decent income tax.

  7. “On the other hand there’s also the substitution effect.”

    Exactly. A week ago I was offered a day’s work, but would have required getting up at 4am, three hours’ drive while still sleepy, and another three hours’ drive home while knackered. I substituting maximising my income with remaining sane and alive.

  8. Interesting point in the papers today. Evidently cruise ships are full of people who are keen to keep their turnover below the VAT limit. They shutter their business and take a holiday instead. Goodness knows how much economic output the country is losing.

    I have a self-employed friend who does that – holidays not cruise. His B2C business is around 70% labour charge 30% parts.

  9. I thought the aim of the soft Left was for us to reduce the amount of time we all spend working. We are all too consumeristic and focused on working when we could be enjoying life.

    They’re all for 30 hour weeks, punitive taxes on overtime etc. Imposed from above, not voluntary.

    Now we have to work harder to make up for higher taxes?

    The square and the circle of this thinking is beyond me.

  10. Sometimes i wonder if mr potatohead actually knows any real people. The idea that i’m going to work harder (or at all) if you confiscate 60% of my income to pay for some transexual black conciseness support workers holiday fund is beyond belief. In fact his insistence that income tax is irrelevant to government spending is an even greater disincentive. If i thought for a moment 60% of my income was going to pay for something useful then i might for a miilisecond not feel so fucked over. As it is his reasoning that tax is only there to curb inflation suggests that if i don’t work and therefore reduce my income I won’t have so much to spend and as inflation is caused by demand exceeding supply i’ll be curbing inflation anyway by reducing demand. Somehow i suspect that shit for brains hasn’t thought things through.

  11. As Gore Vidal might have said, “It’s not enough that the government be rich, the people must be poor.”

    Can’t have a population rich enough to make their own health, education and pension arrangements.

  12. @Pcar
    What about overheads? They are the bigger part of my costs. I couldn’t stand going on a cruise but if someone wants to do so …

  13. @john77, October 30, 2017 at 4:50 pm

    Overheads: he owns the business premises outright. No water & sewage charges. Nothing Leased/HP/Loan financed. Overheads are trade insurace, rates (low), Elec SC and Phone/ADSL.

    The trade insurance means he doesn’t need personal insurance for what most do.

    Tim W may remember the business sector

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