I was reminded of this debate between Arthur Laffer (yes, him of the Laffer curve) and me that took place three years ago by a post from the TaxCOOP who organised it at the OECD in 2018.
The working language of the TaxCOOP is French - and if you don't speak it I am afraid you will have to skip some bits. Arthur Laffer and I spoke in English.
And I will provide a spoiler - I won by 58% to 33%, with the rest undecided, or by 64% to 36% amongst those who actually registered a vote one way or the other.
Arthur was not amused. He'd been all charm beforehand. He did not speak again afterwards.
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So, you had the last Laffer?
Or the Laffer was on him?
If I remember correctly there were number of factors that could explain his theory or his curve and he chose to define it narrowly – like all ‘they’ all do. But who in the Tory and Labour party still believe in his work? Far too many I bet.
He who Laffers last Laffers longest.
The thing with the Laffer curve is it seems half right. It’s clear that if you set tax rates at zero you will raise zero taxes, but it’s the other end that seems to be an assertion not a fact. If you set taxes at 100% surely you gather 100% of all money not zero again. Yes there remains discussion about what shape the line between those two points is, but isn’t it a line from (0,0) to (100,100) not from (0,0) to (100,0)?
Laffer’s curve has some elements IOs truth in it
But the peak is far too the right and not the left (amusingly)
And the extrapolation for policy is just wrong as a result
I thought Laffer didn’t specifify where the peak was, just pointed out that a line from (0,0) to (100,0) must mathematically have a peak somewhere between x=0 and x=100. It could be a sideways b, it could be a sideways d, it could be an n, or anything else. It could have multiple peaks, the peaks could be different heights.
You misread all the pro-curve policy then
The Laffer curve is a statement of the obvious.
tax rate = zero means revenue raised is zero
tax rate = 100% means no one bothers with any economic activity so revenue is zero.
Empirically, we know with tax rates between 0 and 100 we DO raise revenue.
It does not take much imagination to draw a line.
The real question is where does that curve peak?… and all the evidence says “at much higher than current rates”. (And yes, there is evidence).
But this also fails to recognise that tax is so much more than maximising revenue (if you think that then you should get a job at HMT!)… its about justice, inflation control etc. My fear is that even discussing the Laffer Curve means important elements of taxation policy are missed completely.
Quite so
You say:
“The Laffer curve is a statement of the obvious.
tax rate = zero means revenue raised is zero
tax rate = 100% means no one bothers with any economic activity so revenue is zero.”
It’s that second line that doesn’t strike me as “a statment of the obvius”. It seems to be an assertion. Is there evidence for it to be true, or is it a beleif? A useful beleif as then maths forces a line between two zeros which is forced to have at least one peek between the two zeros. If tax rates are at 100% maybe people will still work, as they need to to pay the tax. And if they don’t work they starve.
In very rare cases 100% tax does not stop people working, but I think it has to be accepted that is rare
I enjoyed watching that! That is the first time I have seen Laffer speak and I must say he was far less impressive that I would have thought, given his reputation.
It was easier than I expected!
It seems that strict adherence to fiscal rules seems to be the official position of Conservative, Labour and Liberals. However, listening to Johnson you would think that money is no object and high wages will come from willing employers buying into his fantasies in contrast to Sunaks threat of more austerity and social care is paid for by increased employer and employee National Insurance contributions and 3 extra years of a 5% increase in Council Tax. Who are we to believe – johnson’s bravado or Sunak’
s sternness – the latter I expect. Labour’s paucity of an alternative policy was tempered by a slightly encouraging statement by Rachel Reeves that their green industrial policy investment of £24 billion will be by borrowing not by current account deficit spending. This policy seems to be overlooked on the whole by the commentariat and will doubtless be sidetracked by the Labour right-wing if they do come towards anything like coming to power. On the bright side is that the latest YouGov polling shows the Green party on 9% becoming the third-largest party in the UK and that in Germany they may have greater influence in the new coalition government when it is formed.
[…] got sent this in response to my blog this morning about debating Arthur Laffer. Some might a few scenes offensive, but I don't, I […]