Comments on: Laffer on the blackboard http://www.taxresearch.org.uk/Blog/2008/01/15/laffer-on-the-blackboard/ Richard Murphy on tax and corporate accountability Wed, 03 Dec 2008 20:57:34 +0000 http://wordpress.org/?v=2.6 By: Tax Research UK / McCain: does he really believe in the Laffer curve? http://www.taxresearch.org.uk/Blog/2008/01/15/laffer-on-the-blackboard/#comment-353405 Tax Research UK / McCain: does he really believe in the Laffer curve? Wed, 16 Jan 2008 16:17:07 +0000 http://www.taxresearch.org.uk/Blog/2008/01/15/laffer-on-the-blackboard/#comment-353405 [...] Nice comment on this issue here. Worth reading as a follow up to my recent comment on the issue. [...] [...] Nice comment on this issue here. Worth reading as a follow up to my recent comment on the issue. [...]

]]> By: Tax Research LLP http://www.taxresearch.org.uk/Blog/2008/01/15/laffer-on-the-blackboard/#comment-353076 Tax Research LLP Wed, 16 Jan 2008 10:09:00 +0000 http://www.taxresearch.org.uk/Blog/2008/01/15/laffer-on-the-blackboard/#comment-353076 Thanks Alex Thanks Alex

]]> By: Alex Cobham http://www.taxresearch.org.uk/Blog/2008/01/15/laffer-on-the-blackboard/#comment-352539 Alex Cobham Tue, 15 Jan 2008 22:47:51 +0000 http://www.taxresearch.org.uk/Blog/2008/01/15/laffer-on-the-blackboard/#comment-352539 The really bizarre thing about this paper is that it is intended to be a contribution to the study of tax avoidance behaviour, and yet it models individuals in exactly the way that we know they do not behave. The authors assume individuals maximise some combination of their consumption and their leisure time. Tax evasion in the model therefore increases their consumption-leisure possibilities. However, it also requires some effort (which reduces, by less, their consumption-leisure possibilities), and generates the risk that evaders will be caught and have to pay the tax due and a further cost (further reducing the expected value of their consumption-leisure possibilities). In reality, all the evidence from every country studied (including those with the largest shadow economies) shows that individuals pay many times more tax than is predicted by any conceivable maximisation of the naive type assumed in this paper. In fact, individuals pay systematically more tax when the government uses its revenues to obtain greater redistribution of income, and when individuals believe that other people are also complying. For this reason, one of the most damaging factors for general levels of tax compliance is the high-profile avoidance and evasion of rich individuals (non-domiciles in the UK, anyone?) and large businesses (see e.g. Richard's Mind the Tax Gap). Why should individuals pay if they see the rich don't bother? The payment of tax is a social act, reflecting a commitment to a community of citizens and a contract with government. For this reason, tax cuts that undermine redistribution also contribute in the longer term to lower compliance and lower revenues. This is just one reason why the Laffer curve is wrong - the general economic arguments are well-known. Returning to the IMF paper; the authors claim that their original contribution is to focus on the tax compliance channel (which thereby, it is suggested, rehabilitates the long-discredited Laffer curve). In fact, the paper is weakest in exactly the area in which its authors claim credit - the modelling of compliance. By ignoring the considerable literature in this area, in favour of naive agents maximising simple economic outcomes, the authors effectively assume the answer they then herald as a discovery. Not, all in all, a great triumph. The really bizarre thing about this paper is that it is intended to be a contribution to the study of tax avoidance behaviour, and yet it models individuals in exactly the way that we know they do not behave.

The authors assume individuals maximise some combination of their consumption and their leisure time. Tax evasion in the model therefore increases their consumption-leisure possibilities. However, it also requires some effort (which reduces, by less, their consumption-leisure possibilities), and generates the risk that evaders will be caught and have to pay the tax due and a further cost (further reducing the expected value of their consumption-leisure possibilities).

In reality, all the evidence from every country studied (including those with the largest shadow economies) shows that individuals pay many times more tax than is predicted by any conceivable maximisation of the naive type assumed in this paper.

In fact, individuals pay systematically more tax when the government uses its revenues to obtain greater redistribution of income, and when individuals believe that other people are also complying. For this reason, one of the most damaging factors for general levels of tax compliance is the high-profile avoidance and evasion of rich individuals (non-domiciles in the UK, anyone?) and large businesses (see e.g. Richard’s Mind the Tax Gap). Why should individuals pay if they see the rich don’t bother?

The payment of tax is a social act, reflecting a commitment to a community of citizens and a contract with government. For this reason, tax cuts that undermine redistribution also contribute in the longer term to lower compliance and lower revenues. This is just one reason why the Laffer curve is wrong - the general economic arguments are well-known.

Returning to the IMF paper; the authors claim that their original contribution is to focus on the tax compliance channel (which thereby, it is suggested, rehabilitates the long-discredited Laffer curve). In fact, the paper is weakest in exactly the area in which its authors claim credit - the modelling of compliance. By ignoring the considerable literature in this area, in favour of naive agents maximising simple economic outcomes, the authors effectively assume the answer they then herald as a discovery.

Not, all in all, a great triumph.

]]> By: Mark Lee http://www.taxresearch.org.uk/Blog/2008/01/15/laffer-on-the-blackboard/#comment-352370 Mark Lee Tue, 15 Jan 2008 15:22:12 +0000 http://www.taxresearch.org.uk/Blog/2008/01/15/laffer-on-the-blackboard/#comment-352370 And of course we don't need the Laffer curve to tell us that increasing the effective rate of CGT from 10% to 18% will encourage tax avoidance. The cost/benefit ratio is seen to be more acceptable - to those tempted by such machinations. Thus it will be easier for the purveyors and promoters of such schemes to find people willing to take a risk given the prospect fo saving 18% tax. Shame. And of course we don’t need the Laffer curve to tell us that increasing the effective rate of CGT from 10% to 18% will encourage tax avoidance. The cost/benefit ratio is seen to be more acceptable - to those tempted by such machinations. Thus it will be easier for the purveyors and promoters of such schemes to find people willing to take a risk given the prospect fo saving 18% tax. Shame.

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