The Conservative Party in the UK is the home of some quite bizarre thinking — like belief in the Laffer curve. In the last week an MEP — Roger Helmer — accused Tax Justice Network’s John Christensen of not understanding Laffer. As he said:
You describe tax competition between nations as "A Race to the Bottom". No. It's a race to growth and properity. Here in the EU, MEPs love to talk about "Harmful Tax Competition". But there is no harmful tax competition. All tax competition is good. All attempts at tax harmonisation are cartels operated by governments against the interests of citizens and tax-payers.
Well, that’s anarcho-capitalism for you — but as John has convincingly argued in reply, it’s also plain wrong.
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“Well, that’s anarcho-capitalism for you”
Logic fail there Richard.
Anarcho-capitalists believe in no state – therefore no tax…
Tax competition requires the existence of a state to collect said tax… tax competition is a ‘minarchist’ (really, really small state) view point.
You learn something new every day…
This comment has been deleted. It failed the moderation policy noted here. http://www.taxresearch.org.uk/Blog/comments/. The editor’s decision on this matter is final.
Good point Bobski. It is amazing how many people attack a straw man version of radical libertarianism.
We believe taxation is violence, and we seek a day wen it can be ended.
@PirateRothbard
And you wonder why people think you’re from the Monster Raving Loonies?
Open your eyes
Get a life
Somewhere else
Not here
Did they teach you that in private scool?
I think one can debate the shape of the Laffer curve, but surely at some point rasing tax rates reduces revenue? For example if taxes are 100% at some income level majority of people would seek to minimze their work efforts that fall into that tax band. I think that argument extends at 90%, 80%, 70% too……….60% versus 50% versus 40% more debateable.
Didn’t the tax take go up when Maggie dropped the top rate to 40%?
Appreciate there is an argument that this simply encouraged people to pay themselves more at the top end but isn’t that a different issue?
I’d like to see some data……
I can’t see how the Laffer curve does not make some sense in that clearly most individuals will not work to pay 100% tax and 0% tax raises no tax so mathematically the optimum tax revenues must be raised between 0% and 100% marginal tax rate. The question is what is the shape of the curve and how much higher can taxes be raised (60%,70%)before revenues fall? I appreciate this is not the same as arguing a fairer scoiety benefits from more even incomes, but in terms of raising revenue this makes rational sense to me. Interestingly as per the commentary below one can raise the optimum level of taxation by shutting down loopholes/tax havens…….shouldn’t that be the sensible course of action that aligns most voters not just those who would vote against the cons regardless?
“Laffer explains the model in terms of two interacting effects of taxation: an “arithmetic effect” and an “economic effect”. The “arithmetic effect” assumes that tax revenue raised is the tax rate multiplied by the revenue available for taxation (or tax base). At a 0% tax rate, the model assumes that no tax revenue is raised. The “economic effect” assumes that the tax rate will have an impact on the tax base itself. At the extreme of a 100% tax rate, the government theoretically collects zero revenue because taxpayers change their behavior in response to the tax rate: either they have no incentive to work or they find a way to avoid paying taxes. Thus, the “economic effect” of a 100% tax rate is to decrease the tax base to zero. If this is the case, then somewhere between 0% and 100% lies a tax rate that will maximize revenue. Graphical representations of the curve sometimes appear to put the rate at around 50%, but the optimal rate could theoretically be any percentage greater than 0% and less than 100%. Similarly, the curve is often presented as a parabolic shape, but there is no reason that this is necessarily the case.
Jude Wanniski noted that all economic activity would be unlikely to cease at 100% taxation, but would switch to barter from the exchange of money. He also noted that there can be special circumstances where economic activity can continue for a period at a near 100% taxation rate (for example, in war time).
The Laffer Curve assumes that the Government will collect no tax at a 100% tax rate because there would be no incentive to earn income. However some question whether this assumption is correct. They argue, for example, that in the Soviet Union there was an effective 100% tax rate and yet, while the Soviets were not known for their efficiency, the government still managed to fund a very large and highly dispersed military while at the same time creating a highly advanced space program. In contrast, Wanniski used the outcome of changes in the effective tax rate on farmers in the Soviet Union in support of the Laffer curve theory. (It is also arguable that the Soviet Communist system amounted to slavery and not a free economic market, especially considering that a person could be imprisoned for not working hard enough; thus, people had incentives to work regardless of lack of income.)
Various efforts have been made to quantify the relationship between tax revenue and tax rates (for example, in the United States by the Congressional Budget Office). Whilst the interaction between tax rates and tax revenue is generally accepted, the precise nature of this interaction is debated. In practice, the shape of a hypothetical Laffer curve for a given economy can only be estimated. The relationship between tax rate and tax revenue is likely to vary from one economy to another and depends on the elasticity of supply for labor and various other factors. Even in the same economy, the characteristics of the curve could vary over time. Complexities such as possible differences in the incentive to work for different income groups and progressive taxation complicate the task of estimation. The structure of the curve may also be changed by policy decisions. For example, if tax loopholes and off-shore tax shelters are made more readily available by legislation, the point at which revenue begins to decrease with increased taxation is likely to become lower.
Laffer presented the curve as a pedagogical device to show that, in some circumstances, a reduction in tax rates will actually increase government revenue and not need to be offset by decreased government spending or increased borrowing. For a reduction in tax rates to increase revenue, the current tax rate would need to be higher than the revenue maximizing rate. In 2007, Laffer said that the curve should not be the sole basis for raising or lowering taxes.”
Sir,
I must respectively disagree with this post and the TJN link. The Laffer curve is an inherently real thing. It is not as described as in the TJN link.
The Laffer curve is not about tax competition or tax cuts paying for themselves, these are popular misconceptions. The Laffer curve is about determining the rate of taxation which maximizes the amount collected by the state.
The Laffer curve is quite akin to that of a firm maximising revenues. A firm manufacturing paper clips will receive zero revenues if the price it charges is £0. Similarly, if the firm charges £100 for each paper clip, the result will be zero in revenues. The Laffer curve seeks to find where between 0 and 100 will result in the most revenue received by the firm.
Quite a simple concept and also completely separate from the spending side of things.
The trouble with the Laffer enthusiasts is that they interpret it as meaning that in any circumstance reducing tax rates will result in increased tax revenues. That is drivel. James River’s comments are very interesting in showing the limitations on the theory.
[…] as a reply to the Laffer curve nutters enthusiasts who have been commenting […]