Title says it all really,
I was keeping an eye on and chipping in it times to the GE thread
BUT ( imho )
It’s been derailed by a very narrow discussion
So hopefully that can come here so I don’t have to skim passed comments to view the ge ones 🤣🤣

Property is theft, vive la révolution, etc. Is that the sort of thing you are looking for?

It’s just drivel, some bloke who didn’t like paying tax drew two points on a napkin hypothesising that not taxing the rich was a good thing (no self interest at play here at all) and ever since it’s been taken as gospel by people who don’t want to pay tax.

Footflaps has the most concise and correct answer yet. You can close this thread now.

Well, more seriously, as has been pointed out by people who have studied economics as a profession, a tax rate of 0% would mean zero tax revenue and a tax rate of 100% would also mean no tax revenue, so those two points on the curve are pretty much beyond dispute. Problem is that all the points in between are subject to so many complex variables that it’s impossible to model what happens in practice, which means that tax rates need to be set based on empirical data about what works, not abstract theory. However, it is a useful concept to keep in mind that at some point raising tax rates will become counterproductive, just as it’s important to remember that cutting taxes isn’t the answer to any economic problems.

You can dispute even those two points, depending on what you are taxing, and considering externalities (that always exist and armchair economists like to pretend don’t to make a point) and are looking at revenue over a reasonable period of time, not at some theoretical moment.

You can dispute even those two points,

Well, if you have a tax rate of 0%, I don’t see how you will raise any tax revenue.

If it’s 100%, then only very stupid people would work, so the economy would implode and everyone would starve, assuming they didn’t cheat on their taxes or overthrow the government.

You can increase tax revenue by having a period of grace of tax exemption.

You can increase tax revenue by having a 100% tax if there are other reasons/incentives for the production or investment. For example, think of a byproduct of a production process that has a regulated minimum sales price, is illegal to dump, and prohibitively expensive to store.

You can increase tax revenue by having a 100% tax if there are other reasons/incentives for the production or investment.

In other words, by allowing people to keep something that they produce. That’s not a 100% tax, by definition. A 100% tax means that the government takes 100% of what is produced and the producers keep nothing.

Whoosh – I used the most simple example that I could. If by “in other words” you mean “the exact opposite”, then carry on. Never mind.

Well, if you have a tax rate of 0%, I don’t see how you will raise any tax revenue.

Not necessarily. If we’re talking about income tax then it could encourage people to spend more on taxed goods, for example.

If we’re talking about income tax then it could encourage people to spend more on taxed goods, for example.

If you’re taxing goods, then you don’t have a tax rate of 0%. Really simple.

The graphs concerned aren’t about total tax take… but you are pointing out another reason why, even if the Laffer Curve wasn’t a complete fantasy, it would still be useless… as the aim of the government shouldn’t be to maximise the tax take just for one particular tax.

Really simple.

Overly simple. Grow a market by having 0% tax, then tax later.

I stayed at an Air-BnB in the Bay Area where the owner had left the UK back in the 1970s, in the days of the 70% (or was it more?) tax rate and the infamous “brain drain”.

So Callaghan’s attempt to raise revenue by raising tax just had the exact opposite effect, as this guy has been happily living in his fancy house in the hills ever since, not paying a penny to the UK exchequer.

Result.

even if the Laffer Curve wasn’t a complete fantasy, it would still be useless

It’s useless as a practical matter. It is useful as a conceptual tool to illustrate that an optimal tax rate cannot be 0% or 100%. As you approach the extremes, the results become suboptimal, so the optimal point must be somewhere not right at the extremes. The optimal tax rate is a very complex empirical matter, not a simple theoretical matter.

No tax rate will bring that Brit who left for the US back though.

But not having a tax of 70% may well of stopped him leaving.

Wouldn’t a lot of go away if we actually collected tax that was being evaded in the first place? Note the word ‘evaded’.

Human nature surely. Beyond a certain point why work if most goes to the govt? Take the Scotish Higher Rate tax band of 41% which kicks in at £43440 (rather than rUK 50k). I’m at the point where if I work any overtime I’ll be into the higher tax bracket. At that point on my overtime I’m paying 41% income tax, 12% NI, 9.5 Superann (OK not a tax but still off topline). So I’m left with 37.5% of what I earn. Around £5.50 an hour.

On top of that as soon as I start paying higher rate tax I lose the £250 or so benefit from the Married Couple Allowance I claim sinc mrs IRS pays no tax. So it’s about 45 hours work before I break even.

So I’m trying not to do any overtime. I know I can work round this by making pension payments to get 40% relief of any higher rate tax I pay but it’s a hassle I could do without.

I also appreciate I’m lucky to have the “problem” of paying higher rate tax.

Bottom line there is a point where anyone who doesn’t need to max there earning will say why bother when most goes in tax.

Human nature surely

Problem is that human nature is shaped by culture and environment, as well as genetics. Things that work in one place, might not work in another because people have not been brought up to internalize them. People are selfish to some degree, but also altruistic to some degree. Most people don’t mind paying some level of tax as long as it’s perceived as fair, but what is considered fair differs greatly by country and culture.

If you’re taxing goods, then you don’t have a tax rate of 0%. Really simple.

You do if you don’t buy the goods.

I stayed at an Air-BnB in the Bay Area where the owner had left the UK back in the 1970s, in the days of the 70% (or was it more?) tax rate and the infamous “brain drain”.

So he fled a place that introduced a 70% tax rate for a place that had a 70% tax rate, not long since lowered from 90%?

Behavioural economists would have a field day with that!

Human nature surely. Beyond a certain point why work if most goes to the govt?

Dunno – why DO people volunteer for charities? They get nothing for their work. By the arguments above they must be “stupid”. Or maybe it’s economists that are stupid if they think that people behave like simple robots?

A 100% tax means that the government takes 100% of what is produced and the producers keep nothing.

Some of Laffers own work around the curve showed revenue at tax rates over 100%. Figure that one out.

Bottom line there is a point where anyone who doesn’t need to max there earning will say why bother when most goes in tax.

And that is one of the many ways the Laffer curve fails – it can’t cope with progressive tax systems – it comes from a school of thought that to some degree viewed all tax as regressive.

Other schools would suggest that the tax rate is performing a very useful function. Someone else, younger, more junior on a lower rate of pay and tax might pick up the over time thus saving the company money, getting the work done, paying tax and redistributing money away from the senior people who have first crack at the overtime but don’t need the income.

“irc

Member

Human nature surely. Beyond a certain point why work if most goes to the govt?”

That’s basically the core concept. But (and we covered this in the other thread) the Laffer Curve isn’t a real attempt to find that point. It’s not a model, or a graph of actual results. It’s entirely about taking that nice simple idea, and applying it to the incredibly complex world of taxation, and producing a simple answer that says “let’s cut tax”

The other thread was mostly raging on because people confuse real-world tax/revenue charts with the Laffer Curve. They’re not the same thing, and in fact as soon as you apply real-world numbers, you discover that actually the Curve doesn’t exist. If they were the same thing, there would be no Laffer Curve at all- you can’t easily make a career on just inventing a name for an existing thing, but if you create an imaginary relationship from scratch, which doesn’t resemble the economic reality, well then you’ve got something marketable and different. The reason the Curve gained popularity is that it enabled people to make an argument backed only by theory, not by analysis.

The idea that there’s a “peak tax” point past which raising it further can cause a loss, or that it’s possible to generate growth through a tax cut that can lead to an overall increase in tax take, by taxing a lower proportion of a larger amount, is totally uncontroversial, I don’t think anyone who dismisses the Laffer Curve does so because they think that underlying simplistic concept is faulty.

We dismiss it because it’s not actually mapping that, it’s just Laffer saying “This is the shape it is”. And he always, always said that tax was too high. No Laffer fan in any position of power has ever used it to argue for tax increases.

But then, remember that his actual purpose wasn’t to achieve maximum tax revenue. And the Curve makes no attempt to do so, and never could. He sat down at a table with Dick Cheney who wanted a counter-argument against Ford’s tax raises, and rather than making a fact-based economic argument, invented a nice simple drawing of what the tax-cutting agenda required tax to look like

So when I say that, frinstance, the Kansas experiment where Laffer personally helped form a tax-cutting policy that proved to be absolutely catastrophic and which Kansas has still not recovered from was a failure, it’s because it led to a loss of tax revenues where he claimed there’d be an increase.

But if you’re a tax-cutting hawk who doesn’t like public spending, it was a massive success, because it did lead to slashing of tax and subsequent swingeing cuts on public services including education and medical care. The tax cut was the goal not the means to an end that it was claimed to be

In that way, it’s exactly like Cameron/Osborne “austerity”. It was never actually about saving money; it was just the ideal excuse to make cuts. As an economic policy it failed, but that didn’t matter since it was really a way to justify cutting services, selling the Royal Mail, etc it was a gigantic success.

real-world tax/revenue charts with the Laffer Curve. They’re not the same thing,

Well you said that and when asked for a linky to back it up you didn’t provide one.

I’m pretty sure a laffer curve is still a laffer curve when it’s showing real world data/estimates just as every other curve I recall from economics lessons didn’t have a different name according to whether it had some numbers on the axes.

The thing I’m staggered about this whole debate is why everyone seems to agree that this was a) ‘invented’ by Laffer b) Controversial. Laffer himself says he didn’t invent it. When the first King crated the first tax to buy himself a Bronze Dagger or whatever he must have thought to himself “Hmmm, I can’t tax everyone nothing or I’ll get nothing. And I can’t tax everyone all the goods they own or they’ll stop acquiring goods for me to collect. I know, I’ll tax everyone one rabbit and if that goes well next time I’ll try taxing them one goat and it that’s too much I’ll drop back to a rabbit.”. He’s just created himself a Laffer Curve (Or tax-rate/revenue chart if Northwind comes up with his link) with two data points based on common sense and two data points based on trial and error. (Ok political issues like whether his tribe club him to death will have been involved, but I’m sure STWers would get the point, this stuff isn’t novel, it’s just comon sense.)

It’s useless as a practical matter.

You could equally say that about supply/demand curves and yet somehow with a bit of trial and error suitable values are estimated and we don’t find piles of unsold mars bars at £420 and shelves empty of Snickers Bars at 0.0001p with both manufacturers about to go out of business.

Same with tax. The Laffer curve may be useless, and yet somehow stuff with inelastic demand is often taxed at eye watering rates. (Business rates, Alcohol, Fuel) Someone’s thought about potential revenue and picked a high rate!

Some of Laffers own work around the curve showed revenue at tax rates over 100%. Figure that one out.

Doesn’t surprise me self employed people doing jobs they love, people who (say) run a stables with the primary intention of having somewhere to keep their own horses. But yeah, of all practical purposes at 100pc tax revenue will be ~0.

I’d be happy with a 0% income tax rate if you changed the wealth tax to 100%, as I think that’s the greatest source of inequality and unfairness.

I’ve never understood why we tax income and not just expenditure. Keep NI, remove all income tax (or.maybe all the levels so that 90-95% pay no income tax) but tax goods, especially luxury goods heavily.

I’ve never understood why we tax income and not just expenditure. Keep NI, remove all income tax (or.maybe all the levels so that 90-95% pay no income tax) but tax goods, especially luxury goods heavily.

Agree. I think the main reason is because people claim it’s not progressive. (Not sure I buy that argument. Firstly, I suspect (say) Simon Cowell buys more stuff than me and secondly for reasons I’ve forgotten I’m pretty sure a sales tax by definition can’t be progressive or regressive.)

The big advantage of sales taxes for me is that it’s very difficult to evade and very easy to administer.

it’s just Laffer saying “This is the shape it is”.

He’s certainly not doing that. There are no numbers on the Axes of the ‘generic’ representation, without numbers it’s impossible to tell what shape it is. In fact it’s explicitly stated the shape could be pretty much anything according to the numbers for the “thing”:

the curve might not have only a single peak, nor must it peak symmetrically at 50%.

https://en.wikipedia.org/wiki/Laffer_curve

If that wasn’t the case the Laffer Curve for tax on Potatoes would be the same as the Laffer Curve for tax on diamonds which seems unlikely!

As discussed in the other thread apparently the Laffer Curve for US income tax is fairly flat across a large part of the rate range and from the recent UK changes we can assume that the UK’s is fairly flat around 40-50pc range where we have data points from recent years.

I meant very easy to administer *for the private punter*, obvs it’s a PITA for the seller!

Does a sales-tax only system not just incentivise wealth hoarding? I’m not an economist so that might be a stupid question, but it strikes me that would be really unhealthy for the economy.

(As an aside, I like paying tax)

nixie

Subscriber

I’ve never understood why we tax income and not just expenditure

People with not much money tend to spend most of it. People with lots of money don’t have to. You end up with a situation where having inactive wealth is tax-efficient whereas actually using that wealth isn’t- and wealth only really does anything when it’s in use. You could construct an expenditure tax system which got around this, but it’d be phenomenally difficult to make it work in reality. Income tax works pretty well not because it’s the best concept, but because it’s relatively simple to make it work.

outofbreath

Member

Well you said that and when asked for a linky to back it up you didn’t provide one.

I’m pretty sure a laffer curve is still a laffer curve when it’s showing real world data/estimates

What link could I provide? You’ve read the wiki, I’m sure, which explains it quite nicely. You know what the Laffer Curve looks like, you presumably know that a real world measurement wouldn’t anything like it. That’s it, that’s the entire argument.

“Laffer Curve” is not a name for a graph of tax level vs tax expenditure. The Laffer Curve is Laffer’s drawing of what he wants that graph to look like. That’s what he invented- not the concept, but that hypothetical outcome.

You can’t put real world data into the Laffer Curve. Or rather, you can, and it’ll instantly stop being the Laffer Curve and start being an actual real distribution of tax vs tax revenues, showing that the Laffer Curve is a fiction.

outofbreath

Member

The thing I’m staggered about this whole debate is why everyone seems to agree that this was a) ‘invented’ by Laffer b) Controversial. Laffer himself says he didn’t invent it. When the first King crated the first tax to buy himself a Bronze Dagger or whatever he must have thought to himself “Hmmm, I can’t tax everyone nothing or I’ll get nothing.

Again, the same thing. Laffer didn’t invent the concept, which is ancient, and obvious- he invented the Laffer Curve, that particular theory of how it would resolve itself.

As I’ve explained several times, the concept isn’t controversial. His version of what the tax rate/tax revenue curve looks like, is. The fact that he invented it to argue in favour of tax cuts, is. The fact that it’d be in the dustbin of economic history if not for people who want to cut taxes, is. The fact that he has always declared that all tax rates are too high, is. The fact that every time he’s been able to put the theory into practice it’s completely failed, isn’t controversial either.

Imagine a graph, of number of bikes against time. Very simple, easy to count and plot with real world data. Your wife sees the graph, and says you have too many bikes

So you sit down with me, and tell me you want to buy more bikes but your wife won’t let you, and I draw you a curve for you to show your wife which you can tell her proves that above a certain number, buying more bikes will lead to an actual reduction in the number of bikes. Of course, you are already way over that number, so in fact the smart thing to do is to buy even more bikes.

The “Northwind Curve” isn’t a name for a real bike graph, and if you draw the real curve it isn’t a “Northwind Curve”, it’s just a graph of bikes against time. It’s the name for the imaginary curve which I’ve drawn you in biro. You can’t make the real curve look like the Northwind Curve no matter how much you try, and every time you use the Northwind Curve to justify your bike buying policy, you end up with more bikes and your wife kicks you in the nuts.

OK, so maybe the Northwind Curve has worked, since you have more bikes, which was the actual goal- but the theory has failed, because you have more bikes, and flat nuts.

That’s really it. Here is a pretty good takedown which shows that to this day, Laffer is falsifying data in order to push the tax-cut agenda.

States with “High Rate” Income Taxes are Still Outperforming No-Tax States

I did see a graph of tax, revenue and gdp but I can’t remember where, doubtless a bit of googling would find it. Spoiler alert, it’s basically flat. Here is some data though. Graph it and see if you you get a curve.

In 1946, the highest-bracket rate was cut to 86.45% from 94%—and tax receipts were 17.7% of GDP. In 1952, the highest rate was back at 92%, and tax receipts were 19% of GDP. In 1962, the top rate was 91% and receipts were 17.6% of GDP. Two years later, the rate was cut again to 77%—and receipts were 17.6% of GDP. Identical.

In 1982, the top rate was slashed—slashed I tell you—to 50%. And tax receipts were 19.2% of GDP. (Tax receipts were higher at a 50% top rate than any time during the post-WWII era of 80% and 90% tax rates.) The top rate was cut to 38.5% in 1987 then 28% in 1988, and tax receipts were 18.4% and 18.2% of GDP.

We dismiss it because it’s not actually mapping that, it’s just Laffer saying “This is the shape it is”. And he always, always said that tax was too high. No Laffer fan in any position of power has ever used it to argue for tax increases.

This sums it up pretty nicely for me.

Northwind, you have the patience of a saint.

“Laffer Curve” is not a name for a graph of tax level vs tax expenditure. The Laffer Curve is Laffer’s drawing of what he wants that graph to look like. You can’t put real world data into the Laffer Curve. Or rather, you can, and it’ll instantly stop being the Laffer Curve

Not true, because in the wiki link I posted:

1) There are images of the laffer curve with estimated/real numbers and still refers to them as a laffer curve.

2) Caption(s) prove there is no specific ‘shape’ a laffer curve has to conform to: “Figure compares the Laffer curve under the assumption that firms do not respond to changes in the tax rate (Naïve) to the Laffer curve when firms adjust their prices”

3) There’s are laffer curves with real/estimated figures. One of the captions. “An asymmetric Laffer curve with a maximum revenue point at around a 70% tax rate, as estimated by Trabandt and Uhlig (2011)”

4) The idea that Laffer claims that there is one identical curve that fits every tax in every country in every time period is self evidently absurd. (By your definition of Laffer Curve or mine.)

5) You can’t apply Rolle’s Theorem to a graph with no numbers.

https://en.wikipedia.org/wiki/Laffer_curve

Graph it and see if you you get a curve.

There is no “specific shape” suggested by Laffer that a laffer curve has to conform to “the curve might not have only a single peak, nor must it peak symmetrically at 50%.”

A supply/demand curve doesn’t have to be curved. Nor does a Laffer curve. All we know about the laffer curve before we plot the numbers is it has two points at zero and a point at non-zero. Otherwise you’d be saying there was one laffer curve to fit every taxable thing in the universe in every place in the universe. The laffer curve for cheese tax on the moon is 100pc flat!

….plus your example seems like a flat curve to me and I can see nothing about it that stops it being a laffer curve. Plus we can make it as “pointy” or as flat as we want by choosing the scale of the axes to suit.