This isn’t the Laffer Curve

True, the Commission argues the shortfall would have been greater without the extra levy, but it is still way below targets and doing nothing to help fund public services. Indeed, despite tax rises worth an estimated £535m, one forecaster at the Institute for Fiscal Studies suggests Scotland will only have only an extra £6m to spend as a result of the changes.

As Paul Johnson, the widely respected, and always strictly impartial director of the IFS, succinctly put it, the “Scottish government has implemented over £500m of income tax increases (equivalent to more than £5bn in UK terms). These have netted ‘nothing’ in additional revenues relative to no devolution. Scottish incomes have risen more slowly, and [the] income tax base has shrunk, relative to [the] UK.”

It’s about the 1% surcharge on income tax in Scotland. Which seems not to have brought in much money.

In fact, Sturgeon and her government are getting a real-world lesson in basic economics. As the economist Arthur Laffer established more than half a century ago, with his famous Laffer Curve, when you put up taxes, behaviour changes, and so does the way that people work, and the distribution of jobs, so you won’t necessarily collect all the taxes you expect to.

Quite so, these are Laffer Effects, not the full curve.

9 thoughts on “This isn’t the Laffer Curve”

  1. So an independent Scotland should want to have lower tax than England so as to “steal” jobs and workers and therefore tax revenue?

  2. “So an independent Scotland should want to have lower tax than England so as to “steal” jobs and workers and therefore tax revenue?”

    Well, raising the tax didn’t work. What have they got to lose by cutting the tax? Tax cutting has worked elsewhere. I know that’s probably not theologically pure, but Government ought to have a passing interest in what works.

  3. While I totally agree (and could probably have predicted this outcome), criticism on revenue grounds misses the point. Everything, but everything, the SNP does must be viewed through the lens of its desire to demolish the UK. That this measure has raised no money is utterly irrelevant. Indeed, it may even be seen as a success, in that it was an entirely “free” way of making Scotland even more different to the rest of the country.

    “Well, raising the tax didn’t work. What have they got to lose by cutting the tax?”

    About a million former Labour voters.

  4. “Quite so, these are Laffer Effects, not the full curve.”

    That’s probably nit picking Tim – at least he’s identified the effect and that it exists…

  5. “As the economist Arthur Laffer established more than half a century ago”

    Except that Laffer never did claim to have ‘established’ this, with Laffer noting that there are many antecedents, going as far back as the 14th-century where the effect was noted by an Islamic scholar Ibn Khaldun and more recently in the writings of John Maynard Keynes and Adam Smith.

  6. Bloke in North Dorset

    Andrew C,

    It goes back even further, according to one telling in the History of Rome podcast. When the junior Caeser Julian based himself in Paris in 360 he was short of funds to feed and pay his troops. The Governor hated him and wouldn’t help and at the time the provincial governors had control of the tax system.

    Julian had seen that the system was corrupt, with the rich barely paying anything, so, against the orders of the Emperor, he took over the city, reduced the tax and made everyone pay. This raised the tax revenue so he could pay and feed his troops but also made him popular with the city poor, who’d borne most of the burden.

    Eventually his troops declared him emperor.

  7. It is a convention of modern Economics that when an obvious, commonsensical observation, hoary with history, is repeated by a modern American economist, his name must be attached to it.

    Does this reflect the vanity of American Economists or the ignorance of those who listen to them?

    Yes.

  8. GlassFloor: yes.

    It worked wonders for Ireland with corporate tax.

    It’s not harming Texas, with income tax.

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