The argument here is that of the utterly discredited Laffer curve. How can they still be banging on about that when the effect does not exist at any known tax rate, except, maybe that on moving from universal credit into work?
The taper rate for UC is 55%. The best guess we’ve got (Diamond and Saez) of the peak of the Laffer Curve in a tax system with allowances is 54%. The current UK tax on incomes (S&D uses “taxes on income” not income tax, so income tax plus employers’ and employees’ NI) can be 54% or a little above. Add in student loan repayments and substantially.
Man’s simply a buffoon
Laffer got his curve and Murphy got his law
Obviously the Laffer curve exists; but it’s not the same at all income levels and all ages. If you’re young and broke, but trying to get enough money for a car / a house / an engagement ring, then you might well work through a 75% tax rate just to hit your target. Conversely if you’re aged 60, you might well think you’re not getting out of bed only to lose 50% to the taxman; and choose early retirement instead.
The implications for tax policy are interesting, to say the least.
That’s the, erm, income and substitution effects, the interplay of which make up the Laffer Curve…..
That would seem to reflect reality, Tim. Every individual has their own Laffer Curve. So what economists use is the aggregate. It certainly chimes with the way I see both the economy & markets. They’re convenient fictions. They’re made up of individuals making individual decisions.
Not a concept would be embraced by the Sage of Ely though, is it? Who seems to believe he’s the only individual on the planet.
So presumably if a government decided to tax the income from grants at (say) 70%, Spud would continue working exactly the same?
It ain’t no Laffing matter …
Even as a philosophical argument it makes sense.
At zero tax rate you get no tax, at 100% tak rate you get no tax because no one works.
In between you get more than zero tax. Somewhere is an optimal tax point based on the average of peoples behaviours.
It is not a complicated argument.
there are broadly 3 points where the take home income per pound earned is scarily low, around 35%.
Coming off benefits
Around £50k with kids
Over £125k
I know poeple at all 3 points and to a man and woman they all put huge effort into not paying that. Respectively:
Cash in hand work
Gone down to 4 days a week after a pay rise
Pension, electric cars, cycle to work and anything else they can think of.
Now look at the inheritance tax revenue stream – it all comes from estates less than a couple of million. Not worth financial planning or didnt realise how much the house was worth and so on. Everyone with more than that behaves differently – spends money on accountants lawyers and schemes – to avoid losing 40%.
Laffer doesnt exist my left butt cheek.
Brilliant analysis by the Swan
Not really a fair fight is it?
Art Laffer – known worldwide for supply-side economics and the Laffer Curve
Richard Murphy – known (largely by the commentators on his blog and this) for Sustainable Cost Accounting, the Fair Tax Mark and, most of all, for being a petulant, repellent cvnt.
Of course it applies. The man is a cretin. Laffer merely observed human nature in action. There comes a point where the state steals so much of your money, that the extra effort to earn it isn’t worth it. Been there, done that – I am an example of the Laffer curve in action. Did I say that the man is a cretin?
On his blog, he’s now claiming he debated “Laffer about Laffer and won” – in front of a right-wing audience. This ‘proves’ he is right.
The debate he’s referring to was about tax competition between countries and nothing to do with the Laffer curve.
The vote was by text so he can’t even know who voted, never mind their politics.
He really is a bumptious turd.
Productive people buggering off to live in another country has to be a factor too.
I’m expecting Labour to impose horrendous tax rises on people who work, save or invest so we’ll probably get to see who is right fairly soon.
What would be a tax friendlier country? Asking for a friend.
What would be a tax friendlier country?
The PRPC. The Peoples Republic of Pay Cash
What would be a tax friendlier country? Asking for a friend.
Cyprus is pretty good…
Has Lord Spud indicated how much a 100% tax rate would raise in year two?
@Swannypol – “At zero tax rate you get no tax,”
No. People can (and do!) pay voluntary tax (not very much, of course), so it’s not zero.
– “at 100% tak rate you get no tax because no one works.”
No. 100% tax is slavery, and people very much do work under such a system, as the alterntives are things like being whipped or executed.
– “Somewhere is an optimal tax point based on the average of peoples behaviours.”
No. To show that you would need to show that there is an average. In the real world, behaviour constantly changes and is influenced by such a wide range of factors that it is impossible to have a single optimal point.
For example, suppose some tax is currently 15%, and it can be avoided by putting certain assets into a trust. Many people will find it uneconomical to pay the setup costs of avoiding the tax, so won’t. It might be possible to increase tax take by increasing the rate to 20%, after which it falls due to more people finding it worthwhile to use avoidance techniques. So 20% is the the optimal. But suppose instead that the tax started at 30%. At this rate avoidance techniques would already be widely deployed. Maybe reducing the tax rate to 20% results in lower tax take as people do not see an advantage to undoing their avoidance schemes. That would might make the optimal tax rate be 30%.
Or for a real-world example, see how announcing the imposition of VAT on school fees, which makes many people pay now for future fees. We can imagine the reverse, whereby an announced reduction of VAT might make people defer paying as long as possible, reducing the tax take before any actual change ws made.
– ” It is not a complicated argument.”
No. It’s just wrong.
“Laffer is wrong because slavery” says the winner of the next Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Looks like Spud has competition.