Laffer and the Yeti

My post "Oh no, not again" about Ed Balls' 50p tax rate policy sparked something of a debate. This post at Pieria disagrees with my view that the 50p rate is pointless and argues that it is justified as a response to growing inequality. I have now posted a response, also at Pieria, which focuses on the morality of taxation - and debunks both the Laffer curve and "trickle down economics". Here's a taster:
"In this recent post, I argued that Ed Balls’ policy of reversing the Conservatives’ 5p cut in the top rate of tax was pointless. My argument was principally an economic one.  Balls had stated that the tax increase would be used to reduce the deficit, but research from both HMRC and the IFS suggests that such a small increase would make little or no difference to tax revenues. Deficit reduction cannot possibly come from minor adjustments to tax codes. What is needed is growth. 
"But this is not to say that higher taxes on the rich are necessarily a bad idea. Beliefs about the relationship between tax rates and tax revenues (the so-called Laffer curve) are largely unsupported by evidence.
"The Laffer curve is rather like the Yeti...."
Read on here.

Comments

  1. It's a very interesting post,and I agree with the things you write. It's the things you don't write that I think need some consideration.

    First, I think that relative levels of taxation are as important as nominal levels. If every country you would be willing to live in have more or less the same levels of taxation, then a 5% change in one country isn't going to produce a mass migration of wealth producers. But back in the Sixties, just about every highly successful British pop star, author, etc., lived overseas because there were attractive countries with taxation levels on high incomes far below those of the UK. So we have some, but not unlimited, room for rises.

    Next, we can certainly consider taxation as the cost of belonging to "the club" UK, but clubs have members and players. People pay to watch professional soccer, but the players are paid to play professional soccer. So if one rich person wishes to live in the UK mainly for the advantages of living here, it's reasonable to charge one level of taxation. But if another wishes to come to the UK and devote their time to creating a business, which in turn creates jobs and pays corporate taxes, then perhaps the first rich guy is more like a spectator and the second is more like a player.

    Certainly, morality or justice is one valid way of thinking about taxation levels, but the existing UK taxpayers are also entitled to consider who they want to attract to the UK and what distribution of tax rates will do the job.

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    Replies
    1. But the trouble is many if not most of the top 1% are not genuine 'wealth creators' they are rent seekers.

      The taxation question that nobody seems willing to address concerns the astronomical wealth that has concentrated to the top 10-20% of the UK population. As the ONS revealed recently.

      'The ONS report puts the total wealth of the UK, including pensions, property and savings, at £10.3tn. But the bottom 50% of households own less than one tenth of that, compared to the wealthiest 10% who own 43.8% of the country's assets.'

      http://www.theguardian.com/money/2012/dec/03/richest-10-uk-households-40-per-cent-wealth-ons

      The rentier income off those assets is very lightly taxed. Even a modest land or wealth tax tapered on the top 20% could yield enormous revenues. How much money would have been raised if we had CGT on first homes- a policy that would have also dampened the enormously damaging house price bubble?

      Delete
    2. I think you may be missing my point slightly. I have no objection to taxing rentiers. I am saying that perhaps we should *distinguish* between wealth creators and rentiers.

      Dismissing them all as rentiers kinda begs the question, no?

      Delete
    3. But we do already that through structures like Entrepreneur's Relief no?

      Delete
  2. I queried with the great Mr Worstall how useful the Laffer thing was (see comments). Got this splendid email response.

    "The real use of it is political, of course. Pointing out that you cannot just keep raising taxes and getting the mugs to line up to pay for it.

    There's scarcity in all things: including how much tax you can squeeze out of the population."

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  3. "...For higher tax rates to be economically effective, therefore, the moral case for them must be so clearly made that the rich themselves buy into it because they cannot in conscience do otherwise. We are nowhere near that point. "

    We are nowhere near that point because the majority of the rich are constitutionally incapable of ever getting there. So we have a sort of Catch-22 , but you seem quite unconcerned about it.

    We need more studies ! More debate ! And that will take time. Ah , yes.

    Maybe instead we could appeal to the intellects of the past , the likes of which I haven't observed in my lifetime , and probably never will. For example :

    "It seems to be the law of our general nature, in spite of individual exceptions; and experience declares that man is the only animal which devours his own kind, for I can apply no milder term to the governments of Europe, and to the general prey of the rich on the poor." Thomas Jefferson

    http://founders.archives.gov/?q=%22animal+which+devours%22&s=1111311111&sa=&r=1&sr=#TSJN-01-11-0047-kw-0001

    or :

    "We must make our choice. We may have democracy, or we may have wealth concentrated in the hands of a few, but we can't have both." Louis Brandeis

    http://www.brandeis.edu/legacyfund/bio.html

    And loads more , from Plato and Plutarch to Adam Smith and Teddy Roosevelt. Just use the Google.

    We don't have to reinvent the wheel when the wheels are falling off all around us. It's time for action , not more debate.

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    Replies
    1. "Just use the Google". Yes, the greatest research tool ever invented. Created during your lifetime. What was that you were saying about great minds?

      If all we ever do is recycle the thinking of the past, in the belief that nothing we can dream up could ever be better, we will make the mistakes of the past too. There are great minds today as well. And ALL of us have a responsibility to think, even if our minds are not as great as others past and present.

      As the case for higher taxation for the rich is NOT widely accepted at the moment, it must be made. So I'm afraid debate is necessary, otherwise there can be no action.

      Delete
  4. "..As the case for higher taxation for the rich is NOT widely accepted at the moment,...."

    Not true , at least here in the U.S. Polls consistently show majorities that favor higher taxes on the rich , even among Republicans. I'd be surprised if the feeling on the ground is much different in the U.K. , though I suppose it's possible that Murdoch's mind-control is more effective there.

    Your point , however , is that we must convince the 1% themselves. That won't happen , absent a heads-on-pikes scenario. To paraphrase Upton Sinclair :

    "It is freakin' impossible to get a man to understand something, when his salary depends upon his not understanding it!"

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  5. I think higher taxes on the rich are absolutely a bad idea

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  6. higher taxes on the wealthy can finance more investments in infrastructure and education, which are vital for growth and the economic

    ReplyDelete

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