Tax

Top End of the Laffer Curve

Megan McArdle:

I know I keep pounding the point that at American levels of taxation, the Laffer curve promise of higher revenue on lower rates doesn\’t apply. Well, at 55%, it\’s plausible to believe that it *does* apply. There is a limit to how much you can raise taxes on the rich.

There\’s an interesting if underappreciated point here I think. There\’s two ways in which raising tax will reduce revenues. Or, sorry, possibly could, if we engineer things to move to the right of the peak of the Laffer Curve.

1) All of the usual stuff: if the marginal tax rate is 55% or 75%, then people will simply substitute leisure. Or instead of making high risk high return investments in equity, make low risk ones (tax free municipals look pretty good at high rates of income taxation, like, say, the 98% the UK had on investment income). In short, people will stop doing productive stuff.

2) People will bugger off and do their productive stuff somewhere else. Why pay 60% in the UK when you can pay 13% in Russia or 0% in Monaco?

OK, those are actually both pretty obvious, at least from the European view. But 2) rarely comes up in US discussions of such things. Because, you see, under US tax law, you don\’t get out of paying Uncle Sam (you do get out of State taxes, but not federal) by moving to another country. Unlike most, in fact I think all, other countries in the world, you\’re taxed as a US citizen, not upon where is your residence. So as this ability of US citizens to decamp to Switzerland to avoid the taxes doesn\’t exist (except by giving up citizenship and believe me, the US makes this more difficult than any other country as well) the American debate about the peak of the Laffer Curve concentrates solely on 1).

Whereas, from what I can see, the European one concentrates on 2).

Which leads me on to a favourite annoying little point of mine. There\’s no such thing as "The Laffer Curve". There are a series of them. Depends upon the person, the tax and other bits and bobs associated with the situation. Sure, we can aggregate the population\’s responses to the level of any given tax: but if we forget, in the case of income taxes, those two different ways in which the take can fall, then we\’re going to end up with our presumed peak of the curve in the wrong places.

Now if we make the (gobsmackingly, awfully, wrong, but it\’s to clarify) assumption that the reactions to 1) are the same worldwide we are then left considering only 2). How easy is it for the high earners to flee the tax jurisdication?

For those in the UK, very simple indeed. For those in the US, near impossible. Which leads us to the fact that the peak of the Laffer Curve in the UK is shifted leftwards from the one in the US. Another way of saying the same thing is that the revenue maximising tax rate in the US is higher than it is in the UK.

Of course, I would argue that this means the UK rate should be lowered but I\’m aware that there\’s thems who would argue differently.

 

 

Richard Murphy in The Guardian

He\’s still not really got it:

As a result tax burdens are shifting from companies to ordinary people, whose effective taxation rates in the UK have risen as corporate contributions have fallen.

He\’s missing the idea of tax incidence. Sure, it looks like the corporations are paying all of that tax. But they don\’t really. The corporate income tax is paid by investors, by workers or by customers: the company is just that convenient legal fiction that the cheque comes from. As is detailed here.

Which is why we should abolish coproation tax altogether and simply tax the income when it arrives with the workers or the investors.

Taxation Bananas

This is good news don\’t you think?

Richard Murphy, a tax expert who advised the NAO on its report on the performance of the UK Revenue and Customs, said that large companies are effectively now able to set their own tax rates. "Corporation tax is falling worldwide as a percentage of profits. Corporations seem to be deciding what they should pay, not as a percentage like the rest of us, but as a sum above which they don\’t want to go."

John Christensen, a former economic adviser to the Jersey government and director of the campaign group Tax Justice Network, said the Guardian investigation confirmed that the flight of capital was continuing, having reached unprecedented levels in the 1990s. "The trend in the last 30 years has been to shift the burden of tax away from companies on to the consumer and labour. Capital is increasingly going untaxed."

For as we know, the taxation of corporate profits actually leads to lower wages. Proof here. So we can in fact celebrate these glorious upholders of the workers\’ wages at the expense of the predatory State.

We might also note that capital isn\’t in fact going untaxed: it\’ just being taxed where it ought to be, at the level of the individual, when they receive their dividends or capital gains. A good thing all round then.

Yup!

This is what should happen.

If the Tories want a morally sound and hugely popular tax policy, they should scrap the whole thing and instead cut the taxes of the very poorest. As far as I’m concerned, it’s nothing short of obscene that workers on the minimum wage pay income tax at all, and then have to beg pitifully to be allowed some of it back – assuming they’re eligible, that they can understand the forms, and that they can get over the worry that an incompetent state machinery will pay them too much, and then send the bailiffs round.

Tax credits make their recipients suffer the highest marginal tax rates of any group in society. They show what happens when a man with no imagination and too much faith in his own intellect is allowed to design a policy. Most importantly, as far as the Tories go, they are a policy that has sticky Brown fingerprints all over them, and one that Labour could never disown.

The replacement should be a non-traditional tax cut, aimed squarely at those at the bottom of the workforce. If the Tories scrap the £15bn that tax credits cost, and can fire a further £35bn worth of Gordo’s army of useless numpties, they could afford to raise the personal income tax allowance to a whopping £15,000. If you\’re concerned that vital services would be devastated, just remember that no one really noticed when they were all hired, so it would be surprising if anyone noticed when they get fired. This cut would free those working a 48-hour week on the minimum wage – or up to £6 per hour – from paying any income tax at all.

Nothing could be more powerful, or more attractive. It would be the great symbol of the new Toryism. It would be a slap in the face for Labour’s pretence to be the party that looks after the poor. Every piece of syrup-brained interfering middle-class leftism of the last half-century, from inhuman council estates to ‘progressive’ schooling, has hit the poor hardest. It could be the start of the roll-back – if Cameron has more bottle than Brown.

Guess which political party already advocates this? UKIP.

Marriage and Tax

Well:

In an interview with The Daily Telegraph, Andy Burnham, the Chief Secretary to the Treasury, says there is a “moral case” for promoting the traditional family through the tax system. “I think marriage is best for kids,” he says. “It’s not wrong that the tax system should recognise commitment and marriage.”

Well, yes it is actually. The tax system should be indifferent to whether people have made a promise to the Sky Pilot or not. What you\’re actually saying is that you\’ve noted that such tax breaks are popular. This is known as populism.

Will Hutton. Seriously Confused.

No, really, very seriously confused.

Labour could even have copied the ultra-capitalist Swiss and introduced a small wealth tax levied annually, including on super-rich foreigners living in Britain who enjoy the right to be considered \’non-domiciled\’ and so excused taxation on British income and assets.

Err, non-doms are not excused taxation on British income and assets. They\’re excused taxation on foreign income which they do not bring into the UK. Getting it 100% the wrong way around is pretty bad for a columnist, don\’t you think?

Rather, the take should be raised and the loopholes closed that let much property to be held offshore.

Now I\’m on slightly shakier ground here but I think that again Will has misunderstood the role of domicile here. Indeed, I think this is part of the very reason that we do distinguish between domicile and residence. So you\’re a UK citizen: you can\’t become a non-dom and still live in the UK. You actually have to give up UK citizenship and bugger off elsewhere. (If I get some of this wrong please do correct me.)

Now, if you are a UK citizen and you do bugger off elsewhere, you don\’t have to prove that you are resident elsewhere in order to show that you are non-resident in the UK. Just being out of the country for the requisite number of days in the tax year is enough.

However, to prove that you are not domiciled in the UK any more you do have to prove that you are domiciled elsewhere. That you\’ve got a new citizenship, that you really do live elsewhere and expect to die elsewhere and be buried there (is, I think, the normal formulation).

Now, any property that you own in your own name in the UK (yes, of course trusts can be used to disguise this) is, if you are non-domiciled and non-resident, not taxed by the UK as part of your estate. The assumption is that the other taxman gets his cut. But if you are non-resident but still domiciled then your UK property is indeed subject to inheritance tax.

As I say, I\’m on slightly shaky ground here as I\’m not a tax expert but that\’s what I think happens. And why would the law have been drawn up in this manner?  Why, so that death duties would apply to the great landed estates of the past. If the 4th Marquess of Chinlessness went off to Monaco in order to flee 98% income tax, that was one thing. But unless he then went on to become Monegasque then his 500,000 acres still faced death duties on his expiry and his heirs would have to sell up the great landed estate. That, I believe, was actually the point of devising the tax system this way.

If you want to change the whole set up about domicile and residency, fine, carry on: I\’m not sure that it really matters all that much either way. But it would be nice to see an admission that there\’s more to it than getting hands on some of The City money. It will also mean not getting hands on  some much older money (although this specific example doesn\’t count now as farmland doesn\’t pay IHT).

Back to Will\’s clear and obvious confusion:

Extraordinarily, inheritance tax is felt to be unfair. There is one good reason for this: more than 70 per cent of the take is paid by people inheriting estates of half a million pounds or less.

A point I have made often: the actual rich don\’t pay it. So what should we do?

Labour, of course, should have seen this coming. It should have protected its position by making the case for inheritance tax morally, socially and economically at the same time as designing the system so that it was much fairer. The eligibility threshold for inheritance tax should have been raised, while simultaneously making the rates sharply progressive.

Not so sure about the progressivity but still, OK; we should raise the threshold.

Which is why the emerging consensus that inheritance tax is unfair and should be reduced, if not abolished, (which Shadow Chancellor George Osborne exploited so successfully last week in his proposal to lift the threshold to £1m) is so odd.

Osborne\’s raised the threshold so that it is indeed only the rich that pay. Those with less than £500,000, what we might in these days of house pricing, call the middle classes, don\’t pay 70% of the take any more.

Excellent, so Osbourne has followed the advice of Anthony Giddens, Third Way Guru.

Yet Will thinks this is a bad idea.

Tell me, is it actually a requirement to be ill informed and contradictory to write on economics and taxation for The Observer? I thought those were afflictions reserved for blogs?

 

 

 

 

 

 

Polly on Taxing the Rich

She\’s still not quite got it, has she?

Those registered as a non-domiciliary, absolved from British tax although they live here, would pay a flat rate of £25,000 a year.

Err, no. Income made in hte UK is taxed exactly the same as that of any other resident\’s. It\’s the taxation of overseas income that is at issue here. If you want to think of it in moral terms (which no doubt Polly would), well, what right does the UK State have to income made in, say, Russia? By a Russian?

It\’s not just the non-doms and non-residents, but the private equity tax avoiders and all the mega-rich.

Non-residents now? What, you mean that people who don\’t even live in the UK should be paying UK taxes?

The UK has one of the lowest top rates in the OECD 30 nations, yet the rich use the same roads, services, police and national security to conduct their business in a well-regulated environment, with the NHS to save them when their Porsches crash.

Now that is interesting. The implication of course is that the rich should be paying more because they use the same services. That there might be some fixed amount that people should pay for services does not, of couse, cross Polly\’s mind. However, let\’s look a little more closely. How much of all of the tax take do the rich contribute? And how does that compare to other countries? This is the top 30% of the people (just because that\’s the stat I found) but it doesn\’t actually show what Polly would like it to show.

In the UK, the top 30% of the people, the richest 30%, pay 62% of th total tax take. This is lower than the US for example, at 65% or so. But what about the Nordics? Those perfect social democracies, which Polly would so dearly love us all to be like? Hmm. Finland 56.8%, Norway, 53.8%, Sweden 53.3% and Denmark 48.7%.

So, err, for us to become the sort of society which Polly would like we should be lowering the tax take on the richest 30%.

As house prices rise, more people fear that their estate will creep into the £350,000 level most recently set by Gordon Brown; 37% of estates are now worth over £350,000 (homes, pensions, cash), so if everyone died today then 37% of estates would be liable. But everyone is not dying today. According to Carl Emmerson of the Institute for Fiscal Studies (IFS), by the time people grow old and die they have divested themselves of money, giving it away when children and grandchildren need it, downsizing their homes to spend on cruising, enhancing their pensions or going into long-term care.

Didn\’t Polly recently call for al lifetime gifts to be taxed as inheritances? I\’m sure she did you know.

Good grief!

People think IHT is an unfair "double taxation" out of already taxed income. But no one pays it from income: it is only paid after death by inheritors.

No it isn\’t! it\’s paid by the estate! If £5 million is left to one person or the same £5 million is left to 100 different people the tax paid is the same. If inheritances were taxed at the level of the recipient then there\’d be a great deal less fuss about the whole subject.

Is it worth asking, you know, pleading almost,  that journalists know what they\’re writing about?

Richard Murphy Gets One Right!

I know, it\’s a bit of a shocker but this is simply quite wonderful. You see, Non-Doms don\’t not pay tax at all:

George Osborne has begun to talk tax. On domicile Bloombreg report that he is proposing a flat levy of £25,000 pounds ($51,000) on non- domiciled residents who currently avoid tax.

I’ve got news for George Osborne. The average tax paid by a non-domiciled person now is £26,800, based on Treasury data.

Bravo Mr. Murphy, Bravo!

Speaking With Forked Tongues

I have some sympathy with this statement:

"This analysis misleadingly claims to represent the average situation, but it is undermined by the carefully-selected assumptions on which it is based."

What analysis?

Smith & Williamson estimates that the total taxes paid by a typical family with two children, buying an ordinary terrace house, have soared from 36p in the pound to 54p since 1997.

Well, yes. Only if they move house though and that\’s because a hige chunk of it is the stamp duty on a house which has soared in price. So it is very much a cherry picked number.

A Treasury spokesman said the tax burden on the average family had fallen since 1997.

But that I flat out do not believe. It is clearly not true in nominal, monetary terms.  I doubt very much if it is true in percentage terms. And if we remember that to spend (even to promise to spend) is to tax, then it most certainly isn\’t true. For we\’d have to add in to the tax burden all those wonderful promises for the future, like public sector pensions, the future PFI payments and the Trreasury debt itself.