The Laffer curve is based on a simple claim. It is that when tax rates fall tax revenues will increase. That is because tax is supposedly a disincentive that prevents private sector activity. Therefore if less tax is charged as a percentage rate on each individual or company the amount they do increases so actually more is paid. This is the logic that underpins George Osborne's beliefs on tax - and most especially corporation tax.
As a result the UK rate of corporation tax has been falling heavily:
| Tax year | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|
| Main rate of Corporation Tax | 28% | 26% | 24% | 23% |
And as the Independent reported this month:
Last month Treasury receipts from VAT and income tax — which we all pay — rose by 6.4 per cent relative to October 2011. But corporation tax receipts — levied on the profits of the largest firms in the land — fell by 10 per cent on the same month a year earlier. In October companies poured £7.8bn into the state's coffers, down from the £8.7bn they handed over last year.
So much for the Laffer curve then.
As I've always said: we're already on the upward sloping part of the Laffer curve. That means cutting rates means less tax. And as night follows day, that' s what is happening.
So much for Laffer.
So much for the right wing advocates of Laffer.
So much for George Osborne.
Now shall we have some plain common sense on this issue in future?
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As I’ve always said: we’re already on the downward sloping part of the Laffer curve.
Don’t you mean *upward* sloping part?
Thanks – amended
To be fair to Laffer he clearly stated that the Laffer Curve was a bell curve.
There is thus a point of tax rate optimisation. Raise taxes beyond that and tax revenues fall. However, lower tax rates below this point and tax revenues will also fall.
This point seems to never enter the minds of 95% of right wingers who continually cite the Laffer Curve. They make the mistaken assumption that lower taxes will always raise tax revenues.
Now the trouble with the LC as a policy model is that determining optimum tax rates and drawing the actual real life Laffer Curve is practically impossible. Far too many variables.
But I think its simplistic message is still important – that balance in determining economic policies is vital.
There’s no evidence we have ever been near the peak
Which makes it a useless model
“The Laffer curve is based on a simple claim. It is that when tax rates fall tax revenues will increase”
This is an utter distortion and you know it!…………..As you say in the same page..
“As I’ve always said: we’re already on the downward sloping part of the Laffer curve. That means cutting rates means less tax”
It depends if you are to the left of the peak (might be two peaks) or to the right as to whether cutting rates will raise the tax collected. As you say above it might be that we are already to the left of the peak so lowering taxes will not raise more, totally agree with that.
There is enough of an argument over the Laffer curve without your distorting it!
Oh…..Its also quite likely in the recession that tax collected was going to fall whether you raised the rate or not as you very well know so the whole argument is rubbish to start with…
Oddly those who promote Laffer never mention that cuts can reduce revenue
They did not this time
I accurately portray their crass arguments
How do dividends compare over the same period?
According to Wiki the concept of The Laffer Curve dates back to the 60’s and early 70’s. About the same time as digital calculators came out. The economics then was rather different from now. The Bahamas, for example, only opened shop as a tax haven in 1973. Given the vast changes across the whole monetary sector since then the conditions under which it might be applied are nowhere the same. I like the “idea” the trouble is that a lot of the ideas I used to like simply do not work anymore.
Richard – do we know the profit figures to Oct 2012 or percentage de/increase in profits? Difficult to conclude without them?! Also surely difficult to compare corp tax with income and VAT, as the latter 2 are not profit related.
Also i have always assumed that the government are playing the long game on this and trying to make the UK an atttractive place to do business (‘UK is open for business’)? Might take a while to see the effects? If is does attract business (WPP, Aon and Rowan among some that say they are coming back becuase of the change) then we will see increase in jobs, hence increase in income taxes (largest income for HMRC), reduction in benefits and they will be paying corp. tax on profits – surely 23% of something is better than 28% of bugger all
The Laffer fans never demand such sophistication
They just deliver an article of faith
And prima facie it is wrong
Is that not a complete refutation of the Laffer curve? If it is better to get some percent of something rather than nothing does the same not hold true for profit until you reach 100% tax? Whatever the tax rate you get what is left: and if that something is 30% it is still 30% of something rather than nothing. Of course that rests on the assumption that the only thing that motivates people is profit: not, for example, blackmail
@fiona. No because capital is mobile whereas taxing rights aren’t.
We can solve that
Unitary taxation is the answer
But the Laffer curve has been proven to work. When you raise tax rates above about 74%…
Have you considered falling company profits?
Are they?
yes – we are in a recession – you cannot use a few large companies (starbucks, google, amazon) as a proxy for the entire UK corporate community.
Laffer is useless in the real world as it cannot factor in economic conditions etc. People use laffer as a proxy for saying “at some point in the bell curve the amount of tax raised actually decreases” – which i dont think anyone disagrees with (its just a question of what the optimal tax rate is which frankly no-one knows)
The share of profit in the economy is rising
It is not clear profits are falling
Take is
Appreiate it is not an exact science but one of the big 4 issued this statement when analysing UK quoted companies.
”UK quoted companies issued 68 profit warnings in Q3 2012, the highest
number issued in a third quarter since 2008 and a third more than the
same quarter of 2011”
ICAEW issued something very similar in their Business Monitoring Report for Q4 2012.
The potential for this drop in corp tax to be a result of fall in company profits has to be at least considered when analysing this topic? Making UK an attractive place to do business has to be a good think for our econmocy!
GDP data does not agree with that logic
Richard – have you considered “tax incidence” and whether the burden of corporation tax actually falls mostly on employees (or customers) rather than – rightly – on shareholder returns?
Yes
In the short term almost everyone agrees it is on shareholders
In the longer term it is fairest to say no one is sure
But by then another short term impact on shareholders has arrived
I will live with a sequence of short term impacts the incidence of which we can be reasonably sure about