One of the more contentious economic assertions is that of the Laffer Curve. The idea that tax rates can be so high that they bring in less revenue, not more. Thus lowering the rate can actually increase tax collection. The reason it’s contentious is simply that all too many just don’t want there to be a limit on how much they can charge people for tax. This despite the fact that the basic idea of the curve is simply a mathematical truth. All of the contention should be about which rates, not whether.
Which makes it interesting to see that Laffer Curve out there in the wild of the real economy:
George Osborne’s tax increases for the wealthiest home buyers backfired after a decline in the number of people purchasing property in the most expensive locations.
The government is collecting less stamp duty overall than before the changes were introduced by Mr Osborne, then the chancellor, with a total of £1.987 billion raised in the second quarter of this year from receipts in England and Wales.
The tax raised £1.999 billion in the third quarter of 2015, before Mr Osborne introduced an additional 3 per cent surcharge for second home-buyers and landlords.
Receipts were even lower in the first quarter of this year, at £1.883 billion.
We can talk about “the” Laffer Curve, a level of taxation for the entire economy which reduces income. Trying to tax 90% of GDP is going to run into problems with government trying to plan the economy to that extent long before the Laffer effects are really apparent. It’s this which makes the low tax economies of Hong Kong or Singapore work, not just the taxes but the laissez faire attitude towards markets. Or as we might put it, taxes aren’t the only thing governments do to screw up economies and thereby make us poorer.
However, the way we should really think of this is that there’s a Laffer Curve for each and every tax and they’ll all be different given the surrounding structure of the economy as well. Arguably the peak of the curve for taxes upon income (no, not just income tax) is around 50% to 55%. We’d expect it to be higher in a system where there are no allowances, whereby income can be transformed into lower taxed capital gains, say. Or where you can just change residence to avoid it. Thus US state income tax curves would peak lower than the Federal one, the UK’s be lower than that US Federal one.
But the peak for a consumption tax will be lower than that for income, no one at all thinks we should have a 50% VAT. That for capital gains lower than income and possibly consumption. And that for a transactions tax will be lower again. Which is exactly the result we’re seeing here.
The Laffer Curve is alive and well and it just is true that tax rates can be high enough to reduce tax collection income. In any rational system this thus puts a peak on what tax rates can be. Not that it actually works that way for politics isn’t rational. What we will tend to find is that tax rates are always just a little over that peak….
BTW, to argue that SDLT revenues have fallen just because fewer people are buying and selling – well, yes, that’s the point, isn’t it?