Dogs, Poker and Laffer Curves
Hopi has an excellent post up in the 50p tax rate.
In the comments there has been a somewhat lively debate. Don Paskini, as ever, is making a lot of sense.
Few random thoughts on the Laffer Curve.
The only empirical study I am aware of is the 2005 Congressional Budget Office report of 2005 – “Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates” – requested by the GOP – which said it didn’t work.
Most economists argue that the curve doesn’t take effect until marginal tax rates are in the order of 80-90%. If it worked then the tories shouldn’t be arguing about rasing the rate from 40 to 50% – they should be arging to reduce it to 30%.
Also remember the curve was dreamed up in a meeting in the kid 1970’s between Laffer, Cheney and Rumsfeld and sketched on a knapkin.
A quick search of some economics databases gives the following.
According to Laffer, economic activities are a decreasing function of the taxation rate. As a consequence, total tax revenue increases with the taxation rate at its lower levels and decreases against it at its higher levels. The result is the Laffer curve. According to him, the reason for this decrease lies in decreasing economic activities. Although this may be true for activities in the official (white) sector, in the unofficial (black) sector they can increase under the influence of an increasing taxation rate. Part of the Laffer effect may be nothing more than an activity switch away from the white towards the (hidden) black sector. This paper takes both effects into account: decreasing activities in the white sector combined with increasing activities in the black sector. It examines the computation of the maximum tax revenue generating taxation rate for a number of OECD countries. It concludes that, with the exception of Sweden, the marginal taxation rate in these countries is below its optimum.
I can find a handful studies finding a Laffer Curve effect in emerging markets (especially Russia) which lack a strong state and suffer from high levels of corporation. The only ’empirical evidence’ I can find in the OECD comes from the right wing Cato Institute.
Can anyone point me to evidence suggesting there will be a Laffer effect at 50% in the UK?