|
why reducing income taxes works
- laffer curves
A neat little article on the Laffer
curve and the relationships between tax rates, growth
effects and tax returns in relation to Brown the Clown’s
latest class war spasm, increasing basic tax to 50%
for those earning over £150,000.
“Well, it's a textbook example of the famous
Laffer Curve - the idea that beyond a certain point,
increases in tax rates will reduce tax revenue,
as individual taxpayers change their behaviour to
escape the higher rates. In the words of the Institute
for Fiscal Studies, higher income tax rates incentivise
taxpayers to "work less, retire earlier, emigrate,
contribute more to pension or charity, convert income
to capital gains, incorporate, and invest in tax
avoidance".” [Quoted from burningourmoney.blogspot.com]
Laffer chart based on 2009 UK
budget. Image: Institute for Fiscal Studies [IFS]
The Laffer Curve is based on logic
and empiric experience. It is an attempt to estimate
government tax takes from various tax regimes. Logically,
it is obvious that the tax take will be zero if tax
rates are zero, whereas if tax rates are 100%, people
will not bother to work for (declared) wages. In the
graph above, the blue line represents the government
tax take for ever-increasing tax rates if there was
no behavioural reponse.
As we can see in the graph, whereas
the IFS (Institute for Fiscal Studies) places the
peak of the Laffer Curve for high earners at a marginal
income tax rate around 40%, the government places
it at well over 50%.
The red line is typical of economic
real-world wisdom. But in Britain we have mad socialists
running the government, thus they try to convince
themselves, and the people, that can go on increasing
the tax rate beyond 40% and still obtain increasing
tax. They do this in order to hide the reality that
their objective is to pander to the envy of their
supporters. The reality, as you can see from the red
curve in the graph, is that government tax income
will actually drop as tax rates are pushed much above
40%. But as usual for socialists, despite economic
damage, dogma and perception trump reality.
Notice that this graph applies
to income tax rates on incomes exceeding £150,000
per annum, no where near the greatest source of government
revenues. Similar curves may be estimated for corporation
tax, value added tax and other regimes subject to
behavioural change, for example how much work your
husband will do for a given return!
See also socialist
‘new’ labour’s hidden extra £350
billion tax just this year.
And three short films on the Laffer Curve (20+ minutes
total) from the Centre for Freedom and Prosperity
and the Cato Institute.
film
1 film
2 film
3
useful
essay by laffer on supply-side economics [1]
This essay is very well argued
and clear, as long as you can follow numbers.
“Summary
• This paper serves as a response to a recent
The New Republic article by Jonathan Chait which
criticizes the supply side economics movement and
lays out the typical redistributionist’s case
for raising taxes on the rich.
• While the article refers to supply siders
as “wingnuts,” the tenets of supply-side
economics—low taxes, sound money, free trade,
reduced regulations, etc.—have been adopted
(successfully, I might add) in the U.S. and across
the globe.
• The best way to help the poor is not to
make the rich poorer, but to make the poor richer.
All Americans as a whole have gotten richer as a
result of pro-growth supply-side policies. The economic
and social gains of the past 25 years—across
class, race and gender lines—speak for themselves.
The irony is that many of the policies promoted
by the Left would hurt the very classes of people
whom the Left professes to champion.”
“Christina and David Romer find that the
effect on real GDP of a tax increase of 1% of GDP
is strongly negative both in the short run and over
time. The effect on GDP of a 1% tax increase is
consistently negative and increasing in the damage
it does over time, finally reaching a maximum negative
impact after 10 quarters at which point real GDP
is reduced by 3%. Yikes! Given that both Christina
and David Romer are faculty members at the University
of California, Berkeley, we can be pretty sure that
the results have not been artificially inflated,
if you know what I mean. Now this is academics,
not political rhetoric. Do you really want to advocate
tax increases, Chait?
Deficits are a consequence of both tax and spending
policies. Sometimes deficits are good, and sometimes
they are bad. If someone could borrow at 3% and,
at equal risk, lend at 10%, that person should borrow
as much as he could get his hands on. But, if the
numbers are reversed, and he could borrow at 10%
and only invest at 3%, then he shouldn’t borrow
anything. How much an individual or a country borrows
depends on the spread. Deficits are neither bad
nor good per se—it’s how the proceeds
from borrowing are used that matters.” [p.5]
Laffer includes an excellent quote
from John Maynard Keynes:
“When, on the contrary, I show, a little
elaborately, as in the ensuing chapter, that to
create wealth will increase the national income
and that a large proportion of any increase in the
national income will accrue to an Exchequer, amongst
whose largest outgoings is the payment of incomes
to those who are unemployed and whose receipts are
a proportion of the incomes of those who are occupied,
I hope the reader will feel, whether or not he thinks
himself competent to criticize the argument in detail,
that the answer is just what he would expect—that
it agrees with the instinctive promptings of his
common sense.
“Nor should the argument seem strange that
taxation may be so high as to defeat its object,
and that, given sufficient time to gather the fruits,
a reduction of taxation will run a better chance
than an increase of balancing the budget. For to
take the opposite view today is to resemble a manufacturer
who, running at a loss, decides to raise his price,
and when his declining sales increase the loss,
wrapping himself in the rectitude of plain arithmetic,
decides that prudence requires him to raise the
price still more—and who, when at last his
account is balanced with nought on both sides, is
still found righteously declaring that it would
have been the act of a gambler to reduce the price
when you were already making a loss.” [1933
Essay: The Means to Prosperity, section I: The nature
of the problem, p338, The Collected Writings
of John Maynard Keynes, Macmillan Cambridge
University Press, 1972]
The essay clearly shows the steadily
increasing wealth of the least well off, despite the
lowering GINI.
Link indirectly from Clint Hunter.
end note
Supply-side economics:
- The most effective method of creating economic
growth is by using incentives.
|
advertising
disclaimer
advertising
disclaimer
|
