Jonathan Aldred wants to tell us all that the world is simply awash with bad economics. He’s right of course, the world still has socialists in it. Sadly Aldred teaches Land Economy at Cambridge – the traditional course for those so thick the only career will be inheriting Papa’s estate. Thus he’s not quite up with what actually is good economics.
Take this in the Laffer Curve for example:
But the Laffer curve did remind economists that a revenue-maximising top tax rate somewhere between 0% and 100% must exist. Finding the magic number is another matter: the search continues today. It is worth a brief dig into this research, not least because it is regularly used to veto attempts to reduce inequality by raising tax on the rich. In 2013, for example, the UK chancellor of the exchequer George Osborne reduced the top rate of income tax from 50% to 45%, arguing Laffer-style that the tax cut would lead to little, if any, loss of revenue. Osborne’s argument relied on economic analysis suggesting that the revenue-maximising top tax rate for the UK is about 40%.
Yet the assumptions behind this number are shaky, as most economists involved in producing such figures acknowledge. Let’s begin with the underlying idea: if lower tax rates raise your after-tax pay, you are motivated to work more. It seems plausible enough but, in practice, the effects are likely to be minimal. If income tax falls, many of us cannot work more, even if we wanted to. There is little opportunity to get paid overtime, or otherwise increase our paid working hours, and working harder during current working hours does not lead to higher pay. Even for those who have these opportunities, it is far from clear that they will work more or harder. They may even decide to work less: since after-tax pay has risen, they can choose to work fewer hours and still maintain their previous income level. So the popular presumption that income tax cuts must lead to more work and productive economic activity turns out to have little basis in either common sense or economic theory.
Super, so we’ve the income effect – people aim for an income, therefore a rise in tax rates could lead to them working more, a cut to their working less – and the substitution effect – people think more work’s not worth it if the federasts are getting a 90% slice so bugger it, we’re off fishing. Yes, OK.
But as a critique of the Laffer Curve that falls somewhere short. Because that’s how we work out what the Laffer Curve sodding is. The interplay of the income and substitution effects at different levels of income. Not just work it out, that’s what it is.
In fact, Piketty and colleagues have argued that the revenue-maximising top income tax rate may be as high as 83%.
Those colleagues including Emmanuel Saez. Who worked it out by looking at the interplay of the substitution and income effects. And who also said that this high rate was only true in a society without “allowances”. One of which is the ability to leave the taxing jurisdiction as any Englishman can do. Meaning that the revenue maximising rate in a place with allowances is 54%.
Further, that’s taxes upon income, not income tax. So we must add back in employers’ NI – yes, Saez is very clear on this point. Which, in the UK taxation system means that the revenue maximising rate of income tax is in that 40 to 45% range. Osborne’s right. He also had the luxury of looking at the Treasury’s books to see how much the 50 p rate brought in and he at least said it was less.
So, Jonathan Aldred, teaches summat at Cambridge with economics in the title doncha know. Pity he seems not to have learned any beforehand.