The IFS Is Saying We’re About At The Peak Of The Laffer Curve

It’s true that we might be there, we might not be, but this statement from the IFS is a claim that we are currently at about the peak of the Laffer Curve:

Labour will confirm in its manifesto tomorrow that it will introduce a 45p rate of income tax on those earning more than £80,000 and a 50p rate on those earning above £125,000.

The Institute for Fiscal Studies said that the proposals would cost an employee earning more than £100,000 an additional £1,000 in tax. Those earning £150,000 would lose £5,375.

Labour has previously estimated that annual revenues from the tax rises could reach £6.4 billion.

The Institute for Fiscal Studies, an independent think-tank, said that a “reasonable central estimate” was about £3 billion, because people were likely to reduce their taxable incomes. It added that revenues could even fall if the most well-off took legal tax avoidance measures, moved abroad or refused to declare overseas income.

“It is plausible that it [the policy] could cost around £1 billion,” the IFS said.

Just to get this clear there really is a Laffer Curve. It is true that there are tax rates where, if we raise them, we then gain less revenue. The question is not whether this is true, it’s what is that rate?

The IFS is saying that increasing income tax from its current high end rates could mean less revenue. Thus we’re either at or even over that peak already – mebbe.

All of which seems reasonable really. For every Chancellor wants to pluck to goose and they’ve had a couple of centuries of trying. We’d thus rather expect that tax rates were up at that peak level simply because they’ve been trying so damn hard all this time.

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isp001
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isp001

This math isn’t quite right. Whilst the tax take might go up (adjusting for change in behaviour), Deadweight costs also go up. The gain to the govt is the (tax take adjusted for behaviour). The cost to the non-government side is (tax take adjusted for behaviour + increase in deadweight costs).

So even the top of the laffer curve might be the “wrong” place to be.

Spike
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Spike

No, the Laffer Curve only concerns the tax take. But you’re right, we might want to hold back well below the Laffer peak, and stop raising taxes at a rate just below that which cripples the economy.

PS: Washington Times reported yesterday that students in masks SHUT DOWN a talk at Binghamton (NY) University by Arthur Laffer. Was the assertion that Warren’s/Sanders’ plans to jack up tax rates CANNOT cover their free-surgery plans hurtful to the institution’s Snowflakes?

TD
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TD

There are plenty of lefties who might be willing to acknowledge that the Laffer curve is real, but maximizing tax collections is not their main concern. Their goal is inhibiting wealth accumulation and high tax rates help do that. Mr Worstall often comments that policy should enable people to become wealthier. I concur. However, I’d guess there’s about a fifth of the population would advocate for a poorer society and perhaps quarter who feel there should be caps. That puts them in striking distance of a majority.