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Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]
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Samizdata quote of the day But the problem is worse. For in our taxation of the richer among us we’re pretty much at that Laffer Curve point. Sure, we can argue about whether the income tax take peaks at 40%, 43%, 47% and so on but all the experience (our own experience with the 50% rate, academic research by Diamond and Saez and so on) tells us that when we look at taxes upon income (so, adding NI and so on) then we are at least around about that peak.
Which means that if we’re to increase the tax take as a percentage of the economy, the thing being demanded, then we’re going to have to tax the poorer among us. The very people who don’t have much to start with and who are really going to miss that marginal income.
– Tim Worstall
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As I’ve been saying for years, Dems want more money for the government, so they want higher tax rates and no freedom for the people to avoid paying that rate, whilst Reps want MORE money for the government they pretend to despise, and lower tax rates in order to reap higher tax revenues when people are free to invest or not as they see fit.
Lower tax rates for the rich will definitely result in more tax revenue. 50% of income is “pretty much at that Laffer curve point”? It’s well beyond that point. That amount of taxation not only affects spending, it affects the type of investing one engages in.
The Red Cross only allows one to donate blood every 56 days. Any more frequent and you sap the strength of the donor beyond what can be regenerated with time.
That is not what he wrote 😉
Worstall is well aware that well is past the point, as demonstrated by the UK’s experience with a 50% rate.
There’s merit in Worstall’s argument but I don’t agree with it all.
First, while he clearly understands that the effect of tax changes is dynamic, not static (i.e., changes in rates and/or other factors affects people’s actions, which is what the Laffer Curve describes), he neglects to note that lower marginal rates at the top end generally increases governmental revenues. (This is Thailover’s point.) That was proven by the Kennedy cuts, the Reagan cuts, and will again be proven by the Trump cuts. Not only does it provide an incentive to realize capital gains (generating more tax revenues) but also to invest and grow the overall economy. If his true goal is the utilitarian one of maximizing revenues (which I don’t accept as a meritorious objective), tax cuts can accomplish this even without imposing new taxes on “the poorer among us.”
Second, he states: “We have a great deal of sympathy with the idea that the richer should be paying. But that does mean cutting the State to the size that can be paid for only by the rich.” I disagree completely with the first sentence, and agree with the second only with qualifications. Yes, government should be shrunk to a size which can be paid by existing revenues (i.e., a balanced budget; no operating deficits). But having taxes paid only by “the rich” (however you define that) is a very bad idea. Everyone who benefits from government (which means everyone living in the country, citizen or not) should be paying something toward its cost. In a perfect world I would like to see a flat tax, with everyone paying precisely the same amount. However, I recognize that is unrealistic, and so reluctantly accede to the practical necessity of imposing higher taxes on those with greater incomes. But to allow some people, however poor, to escape taxation altogether is a recipe for disaster; such people have no stake in good government, and can safely become free riders with insatiable demands. They need to feel at least some pain from taxes, no matter how low their income. Here in the US I understand that the portion of the population paying no taxes is approximately 50%. That is unsustainable. Everyone should pay at least some minimum amount of tax.
That’s sort of incomplete. As (my hero) Ms. Thatcher stated, they’d rather that the poor were poorer provided the rich were less rich.
It’s partly that they want control over more and more of our resources, but it’s equally as important to them that they bring down those rich bastards.
It’s envy.
TW : Which means that if we’re to increase the tax take as a percentage of the economy, the thing being demanded, then we’re going to have to tax the poorer among us
I don’t think this follows. If you increase the tax rate on the rich past the Laffer curve inflection point, your tax revenues decline. But so will output. And output must go down proportionately more than the tax rate has gone up, or else you wouldn’t have hit the inflection point.
Consequently increasing the tax rate beyond the Laffer curve inflection point will succeed in increasing the tax take as a percentage of the economy, and it will achieve this by getting output to fall faster than tax revenues. Taxing the poor more is quite unnecessary to achieve this magical result.
Laird : he neglects to note that lower marginal rates at the top end generally increases governmental revenues
I think that’s kinda the definition of being on the wrong side of the Laffer curve.
But it does allow me to trot out an Old Moore aphorism. There’s more than one Laffer curve. Wage slaves have a curve with a peak well to the right of mobile entrepreneurs and spivs. It isn’t even just mobility. The rich can wait things out. The rich can put their feet up and say “can’t be bothered to work at these tax rates” – wage slaves can’t. Obviously in the real political world you can’t have lower tax rates on the rich than on the poor, but if you actually wanted to maximise tax revenues, that’s what you’d do – well not the poor cos they don’t have anything to tax, but the middle class.
+1 Laird and ++1 Lee Moore. I’ve often thought instinctively that the Laffer Curve must be a set of curves, depending on circumstances, but have never seen it described that way. I think that the availability and amount of state benefits may also create another curve or set of curves at the bottom end – the point at which a low-wage earner with few responsibilities says ‘screw it, if I keep working for wages, the added tax bite actually makes me poorer, I’ll go on benefits and work off-the-books.’
Real economists, has this already been done?
llater,
llamas
But the poor are already paying too much, look at the “stealth” taxes that have sneaked in over the last few years. Having to pay for plastic bags in supermarkets, it will go to charity says Cameron, which means the Charities should be crossed off the list of same, forced giving is not Charity. In the same vein, as one gets older so does your House, your property bought with your own money. It needs maintenance at some point, so you get a quote, original quote looks good, but then add VAT and it becomes unaffordable. Theft by stealth is still a crime!
The problem with a flat tax is that it is still an income tax and therefor leaves in place all the complex crap about how income is calculated, what is or isn’t deductible, etc. that forms the bulk of the ridiculously complicated tax code.
A federal sales tax, OTOH, eliminates all of that while not only ensuring that everybody pays something but also, to an extent, incentivizing investment over consumption.
Further, businesses in most states already have systems in place for collecting and remitting state sales taxes. Adding a parallel system for federal sales taxes would not be onerous and would certainly be less onerous than dealing with income taxes.
I humbly submit that a FairTax might be more perfect than a flat tax.
You people think taxes now are about raising money?
@Laird
But having taxes paid only by “the rich” (however you define that) is a very bad idea. Everyone who benefits from government … should be paying something toward its cost.
So, firstly I completely agree Laird. Secondly, something really struck me about this during the American tax changes recently. Currently in the USA (and surely similar elsewhere) the top ten percent of tax payer pay over 70% of the government revenues. To me what would be reasonable would be for that other 90% who are so radically subsidized by the top 10% would be for them to say “thank you very much for helping us out” rather than “more, more, more”.
It is exactly the reason why private charity is vastly better than “entitlements”, a word I find vile in the extreme. Charity benefits the giver because he gets the pleasure of giving and helping out causes that he cares about, and it benefits the receiver both with the value received, but also with the benefit of having someone to be grateful to for the help — something that has immense benefits. Entitlements are just plain evil, demanding money from the giver on threat of felony prosecution, distributing their money to causes they don’t support, or sometimes vehemently oppose, and laying on them a burden of paperwork of utterly ridiculous proportion while stripping all their privacy in the cause of “not cheating”. While to the receiver they confuse being helped with being entitled. They have no-one to thank robbing them of that huge benefit, they are disincentivized from becoming productive and incentivzed to cheat, and further incentivized to behave in extremely determiental fashions, the charitable causes are often very poorly chosen and allocated, and, since it is filtered through the sticky fingers of politicians and bureaucrats they get way less than the givers gave. The only people who benefit are politicians who somehow think they are Carnegie for giving away other people’s money in exchange for votes, and a vast army of bureaucrats empowered to laud it over the needy and draw a paycheck for the worst kind of paper pushing.
Progressive tax rates are really just a form of entitlements, and they are vile in the extreme.
My remark spawned a number of replies which I’ll address separately:
The Laffer Curve is, of course, a series of curves. In fact, it is different for every tax-paying individual, since we all have different ideas of marginal utility. So when we talk about “the” Laffer Curve it is merely the aggregates of all those individual curves. And keep in mind that it is not an actual formula from which a true inflection point can be derived, but rather is merely a device to graphically illustrate a concept.
The Other Rob, you misunderstand a flat tax. It isn’t a flat rate, it is a flat amount. Take total government expenditures and divide it by the population to calculate that amount. Not practical but conceptually the correct way to pay for government. And while I could support replacing the income tax with a federal sales tax, that is most emphatically not what the “Flat Tax” (although it’s often dishonestly described that way by its advocates). I thoroughly despise the travesty which is called the Flat Tax (at least, the version which has been pending in Congress for the last 10 years or so), but that’s a discussion for another time.
Fraser, I agree completely about the term “entitlements”, and the virtues of true private charity.
The wealthy (and not so wealthy) in this country face an income tax rate (on top of all the other taxes) of some 45% – it is insane. And what is worse is that many people (especially the young) are so brainwashed by the education system (the Frankfurt School of Marxism dominated schools and universities) and the television (Sky News just as much as the BBC and C4) that they think “the rich are not paying their fair share”.
The “Social Justice” doctrines pushed (even by the leader of the Conservative Party) will lead to Comrade Corbyn and Comrade McDonnell coming to power – and Britain will be reduced to a savage Third World socialist state.
There may be some way of preventing this – but I do not see it. After all the logical conclusion of the “Social Justice” “justice is fairness” doctrines taught by the entire British establishment (including the Prime Minister and the Chancellor) is Comrade Corbyn and full collectivism. In theory the British establishment oppose Corbyn and co – in practice they are paving the way for this nightmare of destruction, suffering and death.
Merry Christmas everyone.
Laird, thank you for correcting my misapprehension as to the flat tax. It is, as you say, correct but impractical.
Am I correct in assuming that your references to “Flat Tax” following the mention of a federal sales tax were intended to be references to the “Fair Tax”?
TOR, you are correct; I accidentally typed “Flat” twice when I meant “Fair”. It is the dishonestly-named Fair Tax which I despise. Mea culpa. Perhaps our hosts could edit the post to correct the error.
Either the Flat Tax or the (so called) Fair Tax (a national sales tax INSTEAD OF the income tax) would be better than the present mess.
However, now the American tax system is slightly less insane than the British one – thanks to the tax cut.
Of course GOVERNMENT SPENDING remains totally out of control – on both sides of the Atlantic.
Not me. If you’re going to have an income tax, everybody with income should pay some tax, even if it’s only a token amount. In the US George Bush’s tax cut took millions of people off the tax rolls, and in doing so he added quite a bit to the number of people who have no direct interest in limiting the size of the state. If you add the people who don’t pay taxes to the people who work for the government, you’re over 50%. That’s a positive feedback loop that can only end in tears.
There certainly is a limit as to taxation; multiple Laffer curves? Yes!
There’s a limit as to how much tax you can collect from the rich. There really aren’t that many of them. And those that there are? Pretty hard to bleed them beyond a certain level.
Because they can leave the jurisdiction; and even if, as the US does, you claim a right to tax your citizens resident outside your jurisdiction? Well, good luck collecting it.
There’s a limit as to how much tax you can collect from the poor. They don’t have very much money; it’s in the description.
So, that leaves the middle. And it’s there that the Laffer Curve really operates. Because there are a lot of them. And they vote.
“Everyone who benefits from government (which means everyone living in the country, citizen or not) should be paying something toward its cost.”
Note how I qualified that. Pigou Taxes, sin taxes, sure, everyone should be paying those. It is only with income taxes that the richer should be paying, the poorer not.
“There’s more than one Laffer curve”
Most certainly. It’s inherent in the original analysis that the income and substitution effects work in different directions. Different people take different decisions too (empirical research confirms this, amusingly tax drivers seem to be dominated by the income effect, which is both why you can’t find a cab in the rain and also why Uber’s surge pricing works so well). “The” curve is the average of these two effects over the population.
Further, different systems have different curves. Again this is explicit in the research. The Diamond and Saez research mentioned shows that for income it peaks at up around 75% in a system with no allowances, 50% or so in one with. An allowance including such things as being able to escape a tax system by relocating residence, as is true of everywhere except the US.
Then different taxes have different curves. Income tax at say that 50%. A VAT rate above 25% or so would seem to have too many evasion problems – at least no one has really tried to have one consistently above that rate. And as we all know a financial transactions tax of even 0.01% is a revenue loser across the entire tax system.
I’m not particularly interested in sin taxes (which are completely avoidable), and I have significant issues with Pigou Taxes (which are almost entirely political, are relatively insignificant, and don’t [directly] affect the poor anyway). We’re talking about income taxes. “It is only with income taxes that the richer should be paying, the poorer not.” And with that I completely disagree. I will grant that the poor will necessarily pay less (because they have less), but if they pay nothing at all they become free riders and, eventually (as history has clearly proven), greedy, grasping and demanding mendicants. They have no stake in efficient government, or even rational governance, because to them government is nothing more than a bottomless cornucopia and the source of free material goods. It begets a society of leeches.
And this is the reason I strongly oppose refundable tax credits and other forms of “negative income tax”. These are merely forms of welfare, and if we’re to bestow them they should be clearly denominated as such, explicitly budgeted as such, and dispensed via check (or, these days, debit card). But the recipients should nonetheless have to pay some amount of income tax. That is the cost of living in the country, and everyone, regardless of income, should share in paying it.
The biggest problem is what the leftists have with “the rich”, the basic fact that there aren’t enough of them to meet their exorbitant spending plans, so the definition of “rich” starts getting reduced downwards until you end up like the UK with a “higher” tax bracket starting at a lower-middle income, in fact it is exactly aimed at the point when most professions start on that first rung of the social mobility ladder, a supervisory or specialist position as it were, it is almost as if it was designed to punish anyone who dares to think of improving themselves.
Everyone who benefits from government (which means everyone living in the country, citizen or not) should be paying something toward its cost.
If you’re going to have an income tax, everybody with income should pay some tax, even if it’s only a token amount
I think you have to take the statements here in context, in a libertarian utopia, the government would be providing services that mainly benefit the rich, or, will benefit them much more indirectly by having their employees and customers benefit.
About thirty years ago, I proposed a way to fund government (specifically, the State of Maine’s) that did away with taxes and fees, and any other payments by the citizenry to the government, entirely. The essence of it was that government should use some part of its tax take to create an investment fund whose dividends would eventually – governments, being immortal, have a lot of ‘eventually’ – be the sole source of government spending. Most of my proposal was about keeping the politicians from looting the fund before it had grown sufficiently to be the sole source, and controlling its growth after that so it wouldn’t be available to fund runaway government.
Would Samizdata be interested in printing the proposal for its members to read? It runs to about 1500 words.
PfP, I’d be interested in seeing it. I saw a report recently saying that one of the Indian tribes — maybe the Cherokee, or a subtribe thereof? — sends a check every year (or whatever the period is) to every man, woman, and child in the tribe.
If I have it straight, a wealthy member of the tribe invested heavily, many years ago, in Harrah’s casino(s?), expressly so that in time the investment would make the plan possible. I think perhaps some other tribesmen have joined in adding funds to the kitty. Apparently the amount each person gets is by now a respectable sum, enough to make a difference to the poorer members of the tribe.
There is, I understand, no “means testing.” And the whole thing is entirely run on a voluntary basis.
Julie, in Minnesota, several tribes do just that. The Mille Lacs Ojibwe run a casino complex and generate profits to all of their members, and the Mdewakanton Sioux’s casino complex, (Mystic Lake) which is close to the Twin Cities and thus gets huge traffic, pays over $200k per year to each of its 800 or so very lucky members.
Of course, the other ten or so tribal groups are dirt poor, and there’s no sharing.
bobby, very interesting — thank you! Gosh, I just realized, I’m probably part Sioux myself. I’ll have to check with the Great Frog. (Maybe Mizz Warren can help me with the required paperwork, scaring up bona fides, etc.)
On the face of it, that’s great, and more power to them. Does everybody also have to invest? The posting I saw said that there’s no compulsion of any sort for anyone to contribute. (I wonder how much social pressure there is, if any.)
What happens if someone moves away from the reservation (or the general a anyway)?
What about the spouses in a mixed marriage, and the offspring of such?
Do they have problems keeping Organized (or Dis-Organized) Crime out of their operations? Some years ago Quincy, Ill., on the Mississippi, decided against allowing riverboat casinos in its jurisdiction, because of O.C. (and D.-O. C.) has a habit of showing up and taking over.
(That was just a smart-alec remark. There’s no reason at all to think I’m part Sioux. Well, except for $ 200 large. *g*)