The New Statesman gives us the peak of the Laffer Curve

How cool is this?

Clearly 42% marginal tax rates are soceitally undesriable then. Which means that top tax rate (47% ish, 45% plus 2% NI) needs to come down, as does that 60% plus as the personal allowance fades out as does, well, all tax rates really once we add in employers NI.

How cool that it comes from this source!

38 thoughts on “The New Statesman gives us the peak of the Laffer Curve”

  1. We have turned children into luxury items. So you either have the money for the luxury (ie you are rich) or you find someone else to pay for the luxury ( i.e. poor people who live off benefits).

    Middle class people either decide to spend their money on other luxuries or limit themselves to one child.

  2. Umm, “broken” housing market? WTF? Wealth gap? Older people who’ve worked for 30 years shouldn’t have more wealth than 20-somethings? Tax rate for graduates? Taxes don’t apply to non-graduates? Young people have had their wages stagnate for decades? I’m 25 and haven’t seen a wage increases in 30 years!

    FWIW we had a lot of similar discussion in the States years back about Millenials and how/why they weren’t buying cars or houses, etc. Then somebody noticed that as they aged a wee bit more they started buying cars & houses.

  3. Is there a special higher tax rate for graduates now? I’d be all in favour of that. Couldn’t set it high enough.

  4. BiS – probably an implied tax rate due to the Student Loans system. Probably serves the suckers right.

  5. Rachel Cunliffe spent 4 years doing philosophy at university, then went to work in journalism and lives in Cambridge. And I’m guessing isn’t shacked up with a bloke.

    That’s How to Be Poor 101. Do a degree that doesn’t earn money. Delay working until you’re 22. Do a job that doesn’t pay that well. Live in one of the most expensive places in the UK.

    I know someone who had kids about the same age and a mortgage. My hairdresser. No degree. C&G in hairdressing from 16 to 18. So, no debt. Do a job people want to pay for. Live with a bloke who has a reasonable salary at an engineering company and no student debt. Live in Swindon which is reasonably priced. And these people aren’t rich. But you put two £25K salaries together, you can afford a 2 bed house in a place that costs £160K.

    All these journalists complain about this constantly. And I’m not saying we shouldn’t build more housing, but they also make poor life choices. They all have pointless degrees, live in London, Cambridge, Brighton or some other organic sourdough place even though they work on laptops and could be in Chippenham. £100K for a flat there.

  6. Bloke on M4 said:
    “Rachel Cunliffe spent 4 years doing philosophy at university, then went to work in journalism and lives in Cambridge. And I’m guessing isn’t shacked up with a bloke.”

    Philosophy isn’t too bad – 40,000 median earnings, against 48,000 for chemistry. OK, it’s not the returns you get from law or medicine, but it’s not like creative arts or gender studies.

    But yes, still life choices, but more what you do with it afterwards that matters. I’ve known philosophy graduates working in banking or law, earning very well. But journalism in Cambridge is unlikely to make ends meet very comfortably.

  7. reminds me of an ex-colleague who continuously claimed that the rich were not paying enough taxes where the threshold for being rich was earning 30-40% than he did. Over the course of his career this meant a tripling in the absolute threshold between poor and rich

  8. Philosophy can be a perfectly decent degree and often attracts able youngsters – at least, able youngsters with no taste for the sciences and too squeamish for the law. After that if you want to earn well you probably need a bit of “go” about you, vim, spirit, élan, that sort of thing. If not you’ll just have to become a journo.

    A youngster in my extended family read philosophy and after nine years of his career was an executive in an international corporation, earning heaps – far more than Uncle Dearieme ever has. (The next youngest person at his rank in Bigco was 15 years older.)

  9. “isn’t shacked up” – That’s the key. In most parts of the country you’ll struggle to afford anything without two incomes. That makes it nigh impossible to take time off work for child-rearing.

  10. Bloke in North Dorset

    Why do people think they should automatically get pay rises?

    You want more money? Find another employer who values you more, get more qualified and go for promotion, qualify in a skill that pays more. In short, the world does not owe you a living.

  11. But how much of that is just credentialisation, dearieme? He couldn’t of hacked what he does without studying a nonsense subject? Or it got him the interview? How many kids get passed over for greatness because they didn’t do bollocks at uni?

  12. BIND: Exactly! If you’re “not earning enough”, it’s because you’re not *doing* enough. Do more stuff and/or more valuable stuff.

  13. If you want to learn to argue carefully, and in particular to see through phoney arguments, and then write it all up clearly, philosophy is a pretty good training. Better than most economics degrees, I’d think. Better than some science degrees, perhaps.

  14. BiS,

    “But how much of that is just credentialisation, dearieme? He couldn’t of hacked what he does without studying a nonsense subject? Or it got him the interview? How many kids get passed over for greatness because they didn’t do bollocks at uni?”

    Not that many. Most of degree=£££ is correlation, same as private school=£££ is correlation. There’s some courses at university that are valuable, as in, they teach you things that people will pay for. But in general, it’s about how smart, hard-working people who can get a degree are also smart, hard-working people who make good money at work.

  15. The usual whine about the servant problem. As money filtered down to the plebs, they couldn’t be bothered to do the housework for the nobs. No doubt this is the reason they really, really, really want us to be a lot poorer.

  16. Bloke in North Korea (Germany province)

    How many holders of philosophy degrees, especially PPE, are arguing to us that coronavirus is the deadliest plague to ever hit humanity and that we can only conquer it by giving up our freedom, prosperity, humanity, personal medical choices, rights to be with the people we love, and so on.

    They may be very good at arguing that case to non-holders of PPE degrees but clearly aren’t capable of deciding that it is right only to argue correct cases.

  17. I’ve always been bemused by debates on the Laffer Curve.

    On the one hand you get people like RM saying there’s no such thing. Clearly wrong. Try imposing a 0% or 100% tax rate and see how much tax you collect. Clearly, there must be a peak somewhere in the middle. Boom: Laffer Curve.

    On the other other hand, there are those who swear by it. I remember John Redwood using it argue for lower taxes on the grounds that this would bring in more tax, saying he wanted to sweat the rich by making them work more and thereby collecting more tax. He presented absolutely no evidence, of course, that then-current rates were to the right of the peak. The mere existence of the concept was enough for him to be convinced that lowering them was justified.

    He may have been right, but who knows…

    Two reasons come to mind why we can’t know:
    – empirically, it’s a minefield, not least because the peak will change over time. A (slightly stretched) example is when the additional rate was reduced from 50% to 45%. (Come to think of it, this was probably what JR was talking about.) Everyone who could, naturally started deferring income. Clearly, during those few months that the 50% rate endured, 50% was to the right of the peak, but that was because the peak was influenced by everyone’s knowledge of what was to come (or at least partly because; maybe it was anyway). More generally, all sorts of economic factors will move the peak around faster than it could ever be measured, let alone used to adjust rates.

    – as the wording of this tweet accidentally suggests (“for graduates”), the curve is actually multi-dimensional. Where the peak is at any time will depend on, inter-alia, one’s income. It could well be that a 42% rate is to the right of the curve for a recent graduate (assuming that she is talking about the effect of student loan repayments on relatively low earners and, being a bit fast and loose, that this counts as tax for these purposes). Meanwhile, my own marginal rate is somewhere around 60% for various reasons but it’s not stopped working my arse off for my bonus. My “recent graduate” days are somewhat behind me. Regressive tax advocates of course might say that the peak for the richest entrepreneur in the world is zero… (I’m sceptical.)

    I’m sure Tim will gladly explain why I’m wrong on all this, but the Laffer Curve therefore strikes me as a great example of an economic concept that’s brilliant for illustrating a theory of how the world works, but is of absolutely no practical use for policy-setting whatsoever.

    This also, of course, totally ignores the question of whether maximum revenue collection should be the only, or even main, goal of tax policy. I’m sure a few people round here have some opinions on that question!

  18. Bloke on the Bypass: That’s exactly my thinking. Why should “mathematics show this line must have a peak” inexorably lead to “we should set taxes at that peak”? It’s a limit not a target. You should set taxes at the amount that raises what you wish to do, not set taxes at the maximum then decide what to do with it. It’s like saying: my car gets maximum miles per gallon at 65mph, therefore I must drive at 65mph – ploughing through kiddies outside school, and smashing through bends in the road.

  19. @Emil I believe it was Dylan Thomas who said an alcoholic is someone you don’t like that drinks as much as you do

  20. Little wrong with the economics there. Yes, the peak will be different for different people. We know there are plenty of people much more interested in the income effect – I’ve got to make my nut – so there are those for whom a rise in the tax rate makes them work harder. Tends to be at the lower end of the income distribution but only tends.

    Entirely so, maximum tax revenue might not be the best goal.

    However, the concept is trying to talk about the aggregate. So, yes, some work this way, some another. What’s the balance over the whole society?

    Best estimates, for the US tax system, are about 54%. That’s all taxes on income (so, SS, or NI for us) and so on as well as income tax.

    That depends upon the US system of allowances, the big one they don’t have an we do is exit from the tax system just by changing residence. They’ve got to do it by changing citizenship – and there’s an exit tax. Logically, but without empirical proof, our top rate should be lower.

  21. “I want to settle down and have kids too, honey, but the glaciers and the water table.”

    —Absolutely no one on the entire planet

    Edit: May have been uttered by aging spinsters trying to excuse their childlessness in front of relatives

  22. The fact that peaks differ for individuals doesn’t mean that there isn’t a peak when you aggregate them – the (undergraduate level) mathematics involved still insists there must be. Which means that raising tax rates doesn’t guarantee that more tax will be raised, and nor does lowering them guarantee that less will be raised.

  23. The girl seems a nice enough kid. I recall during early Covid lockdown she decamped to her well-heeled parents’ home, her old bedroom, to milk whatever family support was available. At some stage in your early life, however, you need to become an adult, partner up with someone, pool your resources and move on. As others here point out, the generational wealth gap is something to do with old folks having worked for 50 or so years, saved income, and accumulated assets. I left school at 15 and yet 55 years later am still paying an eyewatering amount of tax every week to finance the education and aspirations of young people from wealthy middle class homes that go on to write for The New Statesman.

  24. Maybe I live in a bubble. But I have 7 nephews and 1 neice aged 30-45 that earn decent money and do very nicely. Complaints, when voiced, seem to revolve around not being able to afford a home in one of the better London post codes.

  25. “But in general, it’s about how smart, hard-working people who can get a degree are also smart, hard-working people who make good money at work.”
    So why are so many degree holders stupid lazy c*nts?

  26. @ bis
    The problem you face is the consequence of Tony Blair’s determination that half of all teenagers should go to university. In my youth <10% of teenagers went to uni so one needed to be *very* clever or be clever and hard-working to get in.
    Smart hard-working people who can get a degree are also able to make good money at work if they continue to be smart and hard-working *but* stupid lazy individuals who are given a place at a bums-on-seats "new university" to "study" a rubbish course remain stupid and lazy when theuy emerge with an almost worthless qualification and a load of debt.

  27. @Chris Miller

    “The fact that peaks differ for individuals doesn’t mean that there isn’t a peak when you aggregate them”

    Yes, of course, but the existence of different peaks for particular demographics means that aggregate is going to be pretty meaningless for policy-setting,even if one is a die-hard flat tax advocate (because even they will presumably want to give some thought to the relative impact of a rate on diffent demographics).

    “the (undergraduate level) mathematics involved still insists there must be. Which means that raising tax rates doesn’t guarantee that more tax will be raised, and nor does lowering them guarantee that less will be raised.”

    Again, absolutely agree. The concept and the maths show this to be the case, but my point is that we can never (or rarely) tell which side of the peak we’re actually on in real life. Great in theory, but of limited practical application … unless, perhaps, you’re trying to explain to a politicion/electorate why something ridiculous like 80% top rates are obviously going to bring in less tax. It can’t tell you much about whether a 50% or 45% top rate is going to bring in more, for example.

  28. @BoA720
    Yes, everyone agrees that Laffer tells us nothing about where the maximum will occur – only that there must be one. But we can perform experiments and observe the results.

  29. The oldies among us observed that Geoffrey Howe did perform an experiment and the result was that tax receipts from higher rate taxpayers went up went the marginal tax rate was reduced to 60%.
    I don’t think that even he expected that to happen – the aim was to improve economic performance at a modest cost in tax receipts, but the achievement was to improve economic performance *and* increase tax receipts.
    There is NO excuse for denialists.

  30. Pretty sure that the reduction from 50% to 45% increased the total take, even allowing for the deferment effect after announcement of the reduction. Why the further experiment of reducing it further or removing the 60% band at £100k was never undertaken is beyond me…

  31. @Bloke in North Dorset – “Why do people think they should automatically get pay rises?”

    Because people get better at doing something through practice and experience, so you would expect an employee to get more valuable over time.

    Of course in reality some people improve greatly over time, while others seem to be able to spend ten years repeating the same year ten times.

  32. @Bloke on A720 – “the Laffer Curve therefore strikes me as a great example of an economic concept that’s brilliant for illustrating a theory of how the world works, but is of absolutely no practical use for policy-setting whatsoever.”

    I think that’s a fair assessment. Except for the fact that it’s worse than that as the Laffer curve doesn’t exist. There are multiple reasons, but just to pick one – take the assumption that 100% tax results in zero revenue. That’s not true. You just need something else to motivate people. Slaves pay 100% tax and slavery has been very popular throughout history. All they produce is taken by their masters and they are then given food, shelter etc to allow them to keep working. The perfect embodiment of the principle “From each according to his ability, to each according to his needs”.

  33. 100% tax (in the context of Laffer) sort of assumes that that the recipient gets nil. Food, shelter and all that ain’t nil, obviously…..

    Slavery: All they produce is taken by their masters and they are then given food, shelter etc to allow them to keep working. The perfect embodiment of the principle “From each according to his ability, to each according to his needs”.

    LOL, I might borrow that…

  34. @ Charles
    Yeah – except that 100% tax rates collect nothing from slaves so the tax take from slaves is zero. Your counter-example is an example of why the “zero-tax-take at 100%” is true.
    I find it amazing that lefties argue against the existence of a simple mathematical identity which is incontrovertible instead of trying to argue about what deductions we should make from it. That there *is* (undoubtedly) a peak to the Laffer curve does not automatically mean that the current marginal rate is higher. So one wonders “Are all lefties mad?” – or are they compulsive liars and unable to debate real questions?

  35. @PF “100% tax (in the context of Laffer) sort of assumes that that the recipient gets nil.”

    Well in that case, that’s another reason for it to be nonsense. The normal meaning of taxation is simply money taken from you by the state. The fact that some or all or that is returned to you is irrelevant. Almost everyone benefits in many ways from the tax they pay (such as driving on roads built with taxes, or using public transport subsidised with taxes) and we don’t regard this is them paying less tax.

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