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The Laffer Curve is the contention that there is a tax rate which maximises revenue collection. That’s all it is too. It does not claim – although Art Laffer often does – that this rate is lower than the current one. It just claims that there is a revenue maximising rate.
Underneath the hood there is the joint influence of two processes. Some folks live and work on the basis that there’s a certain income they must have and so they’ll work long enough to get it. Raise their tax rate and they might well work longer. This is the income effect and it’s known that taxi drivers – and thus we assume many other pieceworkers – often do work to this stricture.
There are also people who look at the marginal income from the extra piece of effort and think, well, if I’m only going to get that tiddler portion then I’m off fishing instead. This is the substitution effect.
We’re all subject to both effects. What happens to tax revenues overall depends upon how many of us, how much, react according to either idea when taxes change.
A useful guide is that the lower paid are more driven by the income effect, the higher by the substitution. This isn’t absolutely true but it’s a useful guide.
There are those who absolutely deny that this happens at all. They are wrong:
Official NHS data show that 1,358 GPs and hospital doctors retired early in 2020-21 – up from 401 in 2007-8.
…
The British Medical Association (BMA) said changes in tax regulation were one of the main reasons doctors were choosing to retire early.The data show the average age of retirement fell during this period, from 61 to 59. And the number retiring because they had reached retirement age fell from 2,030 in 2007-08 to 1,594 in 2020-21.
Even The Guardian is nothing it:
The number of doctors retiring early has more than trebled since 2008, prompting fears that burnout and high pension tax bills are prompting medics to leave the NHS.
Doctors gain both good salaries and also very decent indeed pensions. Combine this with a limit on lifetime pension pots and we get, in those final years of a doctoral career, bowelquakingly high marginal tax rates. So, doctors withdraw their labour – the substitution effect.
The Laffer Curve is true. That a tax rate can be too low to maximise revenue is obvious and trivial. But we now have proof that it can also be too high. Therefore there must be that peak.
What the peak is is still up for grabs of course. But the existence is proven.
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I did notice that they cite "burnout and high pension tax bills" for the sudden rise. They don't explain why the impact of burnout would have changed, though. Seems that they had to have something else to lump in there, couldn't leave the impression that a tax increase was a bad thing without some hope to explain it away.
A bit like the mayor of Chicago blaming their increased murder rate on Indiana. Of course, Indiana hasn't moved and there's been no change there that would explain Chicago's murder rate, but hey, can't be her fault.
Why, yes there is: A sudden inflow of productive and high-earning people from Chicago (and elsewhere in Illinois).
If they won't choose to work, we'll just force them to work, dammit. The NHS is the national religion, working for it should be a sacred duty regardless of the financial consequences.
Addressing the issue by considering tax, we broadly have two approaches.
1 - lower the final rate of tax
2 - up the earlier rate of tax.
Which one do you think they'll choose?
Doesn’t the fact that there are more women doctors have a significant effect? Women doctors are usually married to high status/income husbands usually up to ten years older and who will retire on a good pension before them.
Women doctors may be inclined to retire when their husbands do also on a decent pension, to spend time together enjoying their money.
if so it’s a triumph for getting that gender balance right in the workplace. Please, no: not unintended consequences!
If you accept that people will starve to death if they have no money to buy food when the tax rate is 100%, then it is indisputable that there is some rate between 0% and 100% that maximises tax revenue. That is elementary logic. Whether the so-called "Laffer curve" is actually a curve or a disjointed series of lines and points is not something that needs to be known - although determining the optimal tax rate would be easier if it turns out to resemble a dromedary's back.
Taxes went up (even when styles as a cap on income) and the number of practicing doctors went down. Respectfully, the two facts are not "proof" of anything, because there may be other factors. Previous replies list a few. Two others happening in the US since ObamaCare are: docs forced out of private practice and into the shelter of a corporation by inscrutable new rules; and docs forced to divert time from patient care to data entry meeting gov't's (shifting) rules.
The Laffer Curve is a mountain of error from top to bottom.
Firstly, the Laffer Curve is not the contention that there is a tax rate
which maximises revenue collection. That is saying that a curve is a
point, which is clearly wrong. But even so, this is such a small error
on top of the mountain that it is like adding the height of a
mountaineer standing on the summit to the height of the mountain
itself.
The Laffer curve depends on various assumptions, some of which are
rather dubious and some of which are clearly false. Suppose a tax is
currently 30% and it is raised to 50%. It is quite plausible that this
results in less total revenue because people changetheir behaviour.
This is entirely uncontentions and advocates of the Laffer curve are
keen supporters of this idea. But how exactly does revenue reduce?
Well, one way is that people find ways to avoid tax. They employ
accountants to set up schemes or trusts which shield thir money. So
what then happens if the tax rate is reduced back to 30%? Does
everyone immediately stop their tax avoidance? Obviously not. Some tax
avoidance miht stop, if it was only economic because of the tax rate,
but any scheme which works at any rate but was not worth setting up at
30% will remain in use, so at the restored 30% there will be less
total tax revenue than at the starting 30%. This means that there is
no single figure for revenue for a given tax rate, which refute one of
the mathematical foundations on which the Laffer Curve is built.
This then means that it is nonsense to talk of an optimal tax rate.
At best you might be able to say that if you do A, B, and C, which
results in a tax rate of D, then you get maximum revenue. This would
accept the reality that doing P, Q, and R, which also results in a tax
rate of D would get less revenue. The same rate, but different
revenue, so it's not the tax rate that is optimal but the path leading
to it.
Then there's the assumption that 100% tax results in 0% revenue. This
is also nonsense. 100% tax is well tested and works. However, it is
normally referred to as slavery. Out of the 100% tax you have to
provide food and shelter for your slaves, but that doesn't mean your
tax rate is less than 100% - just as provision of free healthcare in a
modern society does not mean that recipients aren't taxed to provide
it. So that's another mathematical foundation which is fatally flawed.
But below it all, there's an error which is far bigger than all of
that, which is the assumption that the people in a society are like
stock on a farm - to be exploited to the maximum. Why should tax
revenue be maximised at all? Do people only exist for the value they
provide in tax? Is it the people who should serve the state, or the
state which should serve its people?
No, the Curve is not a point. But a curve has a maximum and that is a point.
No, tax policy isn't the only factor and the curve doesn't guarantee that tax increases will be counterproductive. But it's a useful point given that all you people, even "centrist" Manchin, tout a repeal of the Trump tax cut to "raise money" to "pay for" things.
No, we shouldn't be targeting the Laffer maximum, but a lower tax rate below that at which taxes start wrecking productivity beyond the benefits of a larger Parasite Sector.
A curve does not necessarily have a maximum, and in any case as I pointed out, there is no curve.
Are you just trolling or are you really that ignorant? There are only two possibilities - either all tax rates produce identical tax receipts or there is one tax rate that produces the maximum.
You do not know that there is no curve and, as I said earlier, it is not necessary for the function Tax Receipts = f(tax rate) to be a curve in order for it to have a maximum.
It is absolutely a fact that every curve has a maximum (which may be infinity) as the only function that does not a have a maximum is y= a constant.
I'm not the ignorant one - you're the person claiming that every curve has a maximum. What's the maximum in the closed interval 0..1 of f(x) = x if x < 0.5, x/2 if x >= 0.5?
That is extremely simple: there is one maximum of 0.5 when x=1 as f(x) < 0.5 if x<0.5 and f(x) =0.25 if x= 0.5.
BUT that is not a curve - it is a discontinous function comprising two straight lines.
Not that it matters - if you had been competent enough to phrase the question correctly so that the function had two maxima that would not affect the statement that every curve has a maximum - I did *not* say that it had a unique maximum.
You missed out the "=" after the comma
I think that you have just demonstrated that I was correct ...
I did make an error, but it was to go back an change "open interval" to "closed interval" as I thought you'd have an objection to that. If I had left it alone, there would have been no maximum. There is no reason to suppose that every curve is continous. Even when dealing with something as mundane as money, there's a reason why you see lots of prices at $9.99 rather than $10 - phychologically there is a discontinuity there.
Since money amounts are discontinuous there really is, not just psychologically, a discontinuity.
Well, yes, I should have objected if you had described a closed interval as an open interval - that would have been cheating. But there would still have been a maximum, actually two maxima, as the value asymptotically approached 0.5 as x approached 0.5 and 1.
Did you ever study any Euclidean geometry? It would have helped you to think logically.
It does not have a (local) maximum at 0.5 - the function's value there is 0.25 - less than f(0.49) = 0.49.
And In have studied plenty geometry - though analysis is more relevant here.
Are you a troll or an idiot? I said "as it asymptotically approached 0.5" not "at 0.5".
It never gets to 0.5, so that's not a maximum.
Feel free to invent a whole new alternative mathematics if you like, but I don't expect any mathematicians will adopt it.
Can you read? f(x) is 0.49999recurring at x=0.49999recurring and x=0.99999recurring. These are maxima.
I haven't invented anything - aymptotes have been part of mathematics since before I was born.
It can be shown by logic that, unless all values of a function are equal than the function has a maximum value (or maxima - it does not need to be unique). Laffer made his name by pointing out this elementary fact could be used to demonstrate that some value of TR maximised the yield from taxation.
Anybody who tries to argue against a mathematical theorem is either ignorant, stupid or a troll.
0.49 is not a maximum, because 0.499 is bigger. Similarly for any other value which in decimal starts with 0.49 and some number of nines. 0.4999 recurring is equal to 0.5, so the function does not have a maximum there as f(x) = 0.25.
Liar, 0.49 recurring is *not* equal to 0.5, nearly but not quite.
I am now going to waste my time by setting out the proof of the utterly obvious fact that the function has maximum.
If the function y=f(x) is not a constant themn it has a maximum. Proof: take point x(0) and find another point x(1) for which y(1)= f(x(1)) is not equal to y(0)=f(x(0)). then either y(1)>y(0) or y(1)<y(0). Choose the greater of y(0) and y(1) and seek another point x(2) so that y(2)=f(x(2)) is greater than y(0) and y(1). If there is no such point that the greater of y(0) and y(1) is the maximum, by definition of the word maximum. If there is one then seek another point x(3) such that y(3)=f(x(3))>y(2). If there is none then y(2) is the maximum. Keep going until you cannot find a point x(n) such that y(n)>y(n-1). Then y(n-1) is the maximum.
Every function that is not a constant has a maximum QED
"The Laffer Curve" is shorthand for the claim that there is a maximum value of the tax take which is a mathematical certainty. The tax take at 0% is zero.
As I have pointed out above there doesn't have to be a curve (it just makes estimation easier if there is).
It does not claim that the tax rate that generates the maximum is invariable across time, nor across countries. It claims that at any given moment for any given taxation jurisdiction there is a tax rate that maximises the tax received.
A marginal tax rate of 100% is not called slavery - the victim is not compelled to work (unless he/she is living in the Soviet Union or the countries that it occupies or some other Marxist dictatorship). You may have forgotten that the top marginal rate was over 100% during the wilson/Healey reign of idiocy.
Your statement that people continue with tax avoidance schemes when the tax rate is cut significantly is refuted by the experience of tax consultants in 1980 when thousands of were made redundant.
If you were old enough to remember Geoffrey Howe increasing tax receipts from higher rate tax by reducing the marginal rate to 60% you wouldn't write such nonsense.
As I pointed out, it is not a certainty of any kind. Insofar as you handwave to narrow it down enough that there might be a maximum (though you don't actually get that far) you render it nonsense. If you have to constrain it to the point where you cannot use it to model reality, it is useless
I didn't mention marginal tax rates. I was only referring to a single tax rate. If there is a single tax rate then taxation at 100% means the state takes everything. If you want to complicate things by having different tax rates then you take a bogus and useless concept and make it even more complicated. Possibly if you make it complicated enough you'll find that people no longer understand it and are more easily bamboozled by it. But it still is wrong.
You mistake what I said about tax avoidance. When the tax rate reduces, that may well result in no more schemes being set up, but it will not necessarily result in existing schemes being abandoned. And once people have learned how to avoid tax (with it being worth their while to put a lot of effort into it when taxes were high) there's no reason why they would forget this when taxes reduce. Of course they won't avoid tax where the effort is not longer worth it, but that may not cover all possibilities.
Firstly, every curve has a maximum. A horizontal straight line is not a curve. If you don't know enough not to expose your abysmal ignorance, you must expect to be a laughing-stock.
Secondly I pointed out that the so-called Laffer curve does not need to be a curve or even continuous to have a maximum - it merely needs a single non-zero value to achieve that condition.
Thirdly, I didn't handwave, so stop slandering me.
Fourthly, in order to model reality one has to consider each tax jurisdiction separately because only the would-be world dictators of the "Tax Justice Network" dream of a world where every country has the same tax rate.
Fifthly, your trumped-up idea that the Laffer curve relates to a non-existent UK (or USA or ...) with a uniform tax rate has no connection with reality or the discussion of an optimal tax rate.
Sixthly, I understood what you said about tax avoidance and you are just plain wrong - as I pointed out. I know people closed down tax avoidance schemes in the early 1980s because I talked to some of them at the time - when the cost of the scheme was greater than the tax saved it wasn't worth keeping it going. Some schemes like redeemable preference shares issued at a big discount to redemption price have simply expired but many actively wound up.
I'll skip most of that nonsense as I would just be repeating myself, and go straing for point six. Just because some tax avoidance schemes were shut down does not mean that every such scheme was. And for some types of tax avoidance there is a setup cost and minimal running costs, so once the scheme is set up there is no reason to stop it if taxes fall.
You're also failing to consider one of the major ways of avoiding tax - emigration. If you emigrate due to what you feel is excessive taxation, having incurred the expense of doing and put down roots elsewhere, it's quite possible that lower taxation is not enough to make you move back. This is an example of hysteresis.
It isn't nonsense - as you presumably know or you would be crowing about every single error that you could find. So it is obvious that you are just being insolent because you haven't got anything that even looks like a good answer.
Emigration? The situation in Ireland in 1850 was different from that in 1840 - who is surprised by that? Are you trying to say that the "Laffer Curve" is invariant over time? Nobody who knows what they are talking suggests that. I have never done so and I don't know anyone who has. In the 1970s, the Wilson/Healey idiocy raised marginal tax rates for a few to over 100%; in the early 1990s I was working with a guy who was, despite being highly intelligent, a member of the Labour Party and he said he would emigrate if they raised the marginal tax rate above 50%. So Laffer maximum had moved down, for him, during Mrs Thatcher's premiership.
But emigration has much less of an impact than people just stopping work when it isn't worth the effort. It isn't a major way - it's a very minor way unless you are Sean Connery or Lewis Hamilton: for every such international "star" who can change domicile with little impact on their earnings there are a million commuters who don't get tax relief on their season tickets who will just give up when the increase in the tax rate leaves them with zilch more than JSA for working. If you had ever looked at the cost of monthly or annual season tickets into London, JSA, and the cost of income tax, national insurance and "cheap" (actually just slightly less horrendously expensive) sandwiches in London, you would know that.
Arguing against the existence of a maximum level of tax receipts for a given country at a given moment by saying that it doesn't exist if the rate of tax creating it isn't constant throughout time is ridiculous.
"Are you trying to say that the “Laffer Curve” is invariant over time? Nobody who knows what they are talking suggests that. I have never done so and I don’t know anyone who has." Well pop over to Expunct and see Tim basing an argument on exactly that: "The insistence in 2010 was that 45% at £150k was the peak of the Laffer Curve. Given inflation and general wage increases since then this must mean that it’s above that peak.". So no allowance for any possibility that the curve might have changed.
I'm not arguing against the existence of a maximum level of tax receipts. I'm arguing that the concept of the Laffer Curve is not valid. It assumes that the tax receipts are determined by the tax rate. In reality they are determined by other factors as well. It's quite possible that you can have the same tax rate produce different receipts depeding on such things as how it is presented and the way it works. For example, National Insurance is part of taxation on incomes, but often forgotten - especially the employers part. This is partly by presenting it as "insurance" so people feel they're getting something in return (even though, of course, this is completely bogus as it is not hypothecated).
What?!? You are quoting Tim as saying that the peak has moved to justify a claim that he says that the rate setting the peak is invariant! YMBJ
Of course tax receipts are determined by a multiplicity of factors BUT, given a set of factors then there is a peak value of tax receipts as a function of marginal tax rates. THAT IS A FACT.
National Insurance is a tax on workers below state pension age and Gordon Brown's pretending that the 2% addition to "National Insurance" was not an income tax was not simply dishonest but also unfair as some of us continued working after 65 and were exempted from his 2% tax. I suggest that you speak to the ghosts of Attlee, Stafford Cripps and Nye Bevan about the bogus nature of NI.
"I'm not arguing against the existence of a maximum level of tax receipts. I'm arguing that the concept of the Laffer Curve is not valid." Are you the Red Queen in Alice through the Looking-glass"? The concept of the Laffer Curve is that there is a maximum level of tax receipts.
Should I address you as "your majesty" in future?
"The concept of the Laffer Curve is that there is a maximum level of tax receipts". Maybe it is. But in that case it's an assertion dressed up in bogus mathematics.
It started as an observation - one that can be tracked back to at least the 14 th century. Later on it was - and is - assumed that it's a curve. But no one does say that it's this type of curve, or that. There's no detailed mathematics in it at all. The "curve" part is little more than a useful visualisation of the interesting observation - sometimes increasing tax rates will increase revenue collected, sometimes it will decrease.
Which is why no one cares about these complaints about "not continuous curve!" and the like. Because they don't mean shit. They're not the point and nor is the mathematics.
No one cares because it's just a rhetorical trick. And a bad one, since someone taken in by it may later realise it's bogus. It's fundamentally a mistake - like arguing with a burglar over what he should steal instead of coming straight out and saying stealing is wrong. Just say that taxation can be excessive.
And even if there was a maximum, you might have a situation where under one scenario an economy produces $1 trillion of value, with $0.3 trillion taken in tax (30%), which could be switched to anoth where $0.8 trillion of value is produced and $0.4 trillion taken in tax (50%). I would hope that very many people would say the second scenario is worse even though more tax is raised.
Rubbish!
It is an observed fact with the supporters driven to use a mathematical identity to demonstrate that it is a fact in the face of ideological advocates of the demonstrated fallacy that a rise in %age tax rates always leads to a higher amount of tax receipts.
I have reason to doubt whether you know the difference between mathematics and bogus mathematics
That is not just a daft analysis of the Laffer Curve, it is daft at great length.
It is a strident attempt to ridicule the notion that there is a principle under which raising tax rates might not always be a good idea.
Not at all. It is merely ridiculing the idea that a bogus argument against high taxes should be used instead of a valid one.
My GP did exactly this. We'd chatted about his ludicrous Lifetime Allowance tax charges and he jacked it in in mid 2020. He was young enough to keep going for quite a few years. I should also say that he was thoroughly fed up with the NHS bureaucracy and bullying and the discourtesy of some of his patients.
Most GPs would find their work highly congenial, were it not for those pesky patients. Luckily, Covid means they no longer have to deal with the public.
Ho ho. True. true. In the same that business would be great if it were not for people, paperwork and customers.
To be fair my bloke was not like that at all. He saw me through a very nasty health scare with great concern, professionalism and care.