Tuesday, 14 February 2012

The Art of the Laffer Curve

It can never be repeated enough - high levels of taxation are self-defeating. We have the third highest marginal rate of income tax in the world. This is bonkers economics. The man who wrote the book on this and has had his theory proved time and again is one of a panel that the Speccie asked to address our no-growth problem (a problem that is NOT being addressed in No. 11 Downing Street). Here is his cut-out-and-keep easy aide memoire to articulate the argument:

Cut the 50p tax Arthur Laffer, Chairman, Laffer Associates
Reducing the burden which government places on the economy, through tax cuts, is the surest way to promote growth. I have never heard of a country that taxed itself into prosperity. Yet Britain last year raised the top rate of income tax from 40 per cent to 50 per cent. For more economic growth, and more tax revenue, this rate should be lowered immediately.

This paradox — lower rates, but higher yield — has been demonstrated time and time again, the world over. Between 1980 and 2007, the US cut tax rates on every form of income, the highest, the lowest and all those in the middle. The result was that the rich paid more, even if their tax levels were reduced. Let’s take the top 1 per cent of earners. Over this 27-year period, their contribution to the income tax collected in America doubled from 19.5 per cent to 40 per cent. The same dynamics applied in Britain: when the top rate of income tax was lowered to 40 per cent in 1988, the share of income tax collected from the richest 1 per cent rose from 14 per cent then to 27 per cent last year. Raising tax rates on the rich is about as bad an idea for the UK as I could imagine.

The government doesn’t need to do something. It needs to undo much of what it already has done. If you want poor people to do better, create jobs, not welfare — and to do this make taxes lower, not higher. ‘The best form of welfare,’ in the words of John F. Kennedy, ‘is still a good high-paying job.’

Not nearly enough people articulate this basic argument. If you test the alternative socialist argument to destruction - tax the rich more and more and they will pay more and more - you will find that the 'rich' (and the wealth creators, and the job creators) have moved abroad, and not just to Switzerland, because ANY other jurisdiction will be an improvement. Remember the old maxim:

Socialism is the equal distribution of misery.


Electro-Kevin said...
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Electro-Kevin said...

On the other side of the coin ...

The best welfare may be a high paying job - so why were loads more unskilled working class people imported to drive down ordinary wages and why were so many jobs allowed to be outsourced ? Especially call centres which now offer inferior foreign service.

We are now in the situation where the set-up is to subsidise low wages with working family tax credits rather than to pay living wages. It is also set up to subsidise Pret a Manger's and Costa's preference for foreign labour to the tune of one person's unemployment benefits every time they choose to ignore a British applicant - which is most of the time.

Taxes aren't being cut for the simple reason that they dare not. There is a massive welfare bill to pay and the growth that would undoubtedly result would not come soon enough.

It would mean the dismantling of the welfare state before there are jobs to replace it. Welfarism is so well established that no government has the guts to deliver such a shock to the system - least of all one with two Liberal leaders at the helm.

None of this is to say that it should not be done. But what we've had in the UK - owing to party politics - is both the worst of capitalism and the worst of socialism wrapped up in one.

idle said...

EK, the cynical importing of cheap European peasant Labour is another post entirely.

My shins are purple from kicks administered by Lady Idle as I exercise my well-worn argument about Brown's fraudulent immigration/faux growth trick which hoodwinked so many for so long and left us in our current neutered state.

Philipa said...

It would help to ease the idea of high taxes if the elite got their rich friends to actually pay their taxes?

idle said...

The rich DO pay their taxes in this country, Philipa - that's my point, and Art Laffer's: the richest 1% pay 27% of all income tax, up from 14% when rates were last as high as this. Let's not go back there!

Sure, there is the odd Philip Green managing to do things differently (within the law), but they are few and far between.

We want the rich to pay oodles of tax in this country AND FEEL FINE ABOUT IT, like in the 25 years from 1985-2010.

Philipa said...

Yes I was referring to the the odd Philip Green. Patrick O'Flynn wrote a good piece in the Express, here, that reminded me of Philip Green.

I do agree with your point that pushing the rich too far is counter-productive. They can afford to go elsewhere and/or hire expensive accountants. I agree that "If you want poor people to do better, create jobs, not welfare — and to do this make taxes lower, not higher. ‘The best form of welfare,’ in the words of John F. Kennedy, ‘is still a good high-paying job.’"

Sadly I don't seem to be having much luck finding a job and have been on a course sat next to men who've been working in their industries 30 years non-stop. All different industries. All now redundant.

Electro-Kevin said...

Clegg/Cameron are both liberal in outlook, it seems. Their reluctance to cut tax is because it would mean a commitment to cut back the public sector and welfare too.

I agree that the rich provide a higher proportion of revenue.

The issue of the importation of labour and the unecessary exportation of jobs was well underway during the Major administration - in fact it was his which signed up to Maastricht and opened the floodgates.

The importation of labour has intensified under the Cameron administration and shows no sign of abating.

This is adding to his welfare obligation and I doubt the newly arrived, low paid, workers are contributing much to cover their liabilities to the NHS or their use of our infrastructure (a water shortage forcast already)

In short the displacement of the UK workforce must be inhibiting Cameron's ability to cut tax when his policy seems to be to subsidise employers' choices to ignore applications from our own people. Or to deliberately make dole more profitable than work.

A £26k cap on welfare ?

That's still £10k above the average wage around here - £25k if you consider that as being tax free.

Cameron is a phoney Tory. As long as he thinks the way he does he simply cannot afford to cut tax.

The problem is that we have the wrong man for the job.