For the past decade or more, “neoliberalism” has been under attack. For example, a few years ago I read a book by the journalist Tom Bergin (Reuters), who argued, with a lot of data and references, that cutting marginal tax rates will not boost an economy. He poured cold water on the ideas of US economist Arthur Laffer, the “father of supply-side economics”, and denied that changes to tax rates make much difference to incentives to work, or so on. (Bergin’s analysis is politely and beautifully skewered, here, by Kristian Niemietz of the IEA. See also this new book by Tim Worstall.)
Of course, it is true that a 1% cut or rise to, say, capital gains tax or other tax will not produce an instant or commensurate change in economic behaviour. The elasticity of supply/demand relationships for labour, capital and land are variable. Labour is not homogenous, as Tyler Cowen notes (this also is a killer for the Marxian labour theory of value); there are frictional costs and sources of inertia that mean an economy cannot be turned on or off like a switch, contrary to the delusions of central planners or, indeed, naive advocates of free markets. But there IS an effect over time.
Changes to incentives compound: if you make it harder to hire and fire, and make it more expensive, irritating and difficult to achieve A or B, then less of what you want will get done. Hiking taxes on employment will reduce labour employed and encourage a substitution of capital for labour, just as taxes on petrol or food will causes changes to consumption, or force those who buy essentials to buy fewer so-called luxuries, or adjust in various other ways, not all of them predictable.
You could argue that the Laffer curve is anchored at both ends. At the zero tax end it is anchored by anarchy, and at the total tax end it is anchored by Utopia. Some politicians don’t see the problem in over-taxing if it brings the likelihood of Utopia nearer.
19th Century French “Liberal School” economists understood the harm that taxes and government spending do better than most British economists – the analysis of J.B. Say has, as far as I know, not been greatly improved on in 200 years.
It is ironic that France has even higher taxes and government spending than the United Kingdom does.
Still dependence on imported food (France is twice the size of the United Kingdom – it has vastly more farm land) and raw materials and the decline of manufacturing mean, I believe, that the future of the United Kingdom will be even worse than the future of France.
As for trying to base an economy of tens of millions of human beings on government spending and on the Credit Bubbles of “The City” – well one might as well try and base the economy of the United Kingdom on Moonbeams and Magic Pixie Dust.
The United Kingdom has a wildly inflated state (government), which tries to provide everything to most people (including me) – it is utterly insane, and it will not last.
New work is taxed at the marginal tax rate. If you make decent money and live in California you are paying 37% Federal Income Tax, 15% FICA tax and up to 13% California state tax. That means you get to keep 35 cents of each new dollar you earn. That makes many projects just not worth the effort. Anybody who thinks getting paid one third of your new income doesn’t discourage new work doesn’t live in the real world.
I also think it is interesting that the left is going bananas about Trump tariffs. We are told it is going to drive prices up and greatly discourage economic growth. Why is a government tax on foreign goods going to do that, but a government tax on personal income not going to do the same?
To be clear, I don’t like tariffs at all. However, the simple fact is the American corporations pay taxes in America to fund the economic system that they work in. Foreign importers do not. If American companies have to pay corporate taxes it just seems only fair that foreign companies do the same, even if we call them tariffs. I’d rather we had neither. But unfortunately I’m not in charge.
Fraser Orr, “…American corporations pay taxes in America to fund the economic system that they work in.”
How do corporate taxes fund the American economic system? If anything, they fund something (government) that decreases economic activity. But I like your analogy of corporate taxation and import tariffs…so yes, let’s knock them both down to zero. Tax spending, not income, not savings, not investment.
And every bozo (Bergin) who trots out a statistic like “billionaires have/do/consume XXX more than the poorest of the poor”, they need to be called on it! The US consumes more energy per capita than any other country (I’m not sure about this but let’s assume it’s true) BUT…BUT, it produces more output per unit of energy consumed than any other country (again I’m not sure this is true but pretend it is). The point being it is not consumption/spending/wealth/whatever per capita that matters but which people/countries/systems are most productive. Right? Any statistic, IOW, damned lie (!), that purports to say something else should be shot down faster than a peace treaty offered by Israel.
The main problem I have with British critics of neoliberalism is their claim that neoliberalism has reigned in the UK in recent decades and therefore is responsible for the dire state of the nation. Britain hasn’t had anything approaching neoliberal economic policy for 30 years and has become ever more statist and socialist over that time.
I thought that the Laffer Curve was the idea that there is a point where increasing tax rates leads to decreasing tax revenues.
Fraser Orr: corporations don’t pay taxes, no business does, it’s their customers that carry the burden because taxes and all other costs are rolled into the prices that people pay for goods and services.
@Henry Cybulski
Fraser Orr: corporations don’t pay taxes, no business does, it’s their customers that carry the burden because taxes and all other costs are rolled into the prices that people pay for goods and services.
I don’t want to get pedantic, but that isn’t true. Corporations do pay taxes, though they fund them with increased prices, which I think is your point. But that only serves to further my point — tariffs are also paid by foreign corporations but also funded by increased prices, which is why I think they are in many respects the same thing.
I’d like to get rid of both, but in the absence of such a thing I am more and more coming round to the idea that tariffs offer a “level playing field”. Though perhaps not at the super high rates Trump suggests.
Patrick, that’s indeed correct. Unfortunately, too many politicians can’t wrap their heads around it.
Patrick and Johnathan Pearce – and the United Kingdom is well beyond the point of maximizing government revenue.
As things decline, the government will respond by pushing up taxes ever more – and things will decline even more, a vicious circle.
Ireland fell into this trap in the late 1840s – a failure of the potato crop, which SOME areas of Ireland depended on, led to pressure on the Poor Law system (only set up in 1838 – less than a decade before, by a minister called Lord John Russell), in the late 1840s Lord Russell (by then Prime Minister) responded to the crises in Ireland by allowing Poor Law taxes to go up and up – and by forcing areas of Ireland that were not dependent on the potato to subsidize, again via higher Poor Law taxes, areas that were. Thus dragging everyone down – “but the Poor Law Tax was a land tax, only landowners were hit” – say people who do not understand that all-taxes-are-passed-on.
This ultra statism of ever more taxation is called “laissez faire” by the ignorant – or the dishonest.
The result was about a quarter of the population either dying or having to flee the country – economic breakdown.
Hopefully the United Kingdom will not be hit so badly – but things will not be nice.
@Patrick Crozier
I thought that the Laffer Curve was the idea that there is a point where increasing tax rates leads to decreasing tax revenues.
This is self evidently true. Obviously if the tax rate were zero then there would be no revenue. If the tax rate were 100% then nobody would work at a paid job, because they’d have to give literally all their salary to the government. And obviously at rates between 0 and 100% people do work and pay taxes.
So it isn’t a matter of opinion, it is a matter of mathematics that there is a tax rate that maximizes revenue. Tax rates lower than that and tax rates higher than that produce less revenue.
Well you could have government revenue with 0% taxes, revenue through donations….which would be enough to fund what a government should be doing….
@Henry Cybulski
Corporations don’t pay taxes, no business does, it’s their customers that carry the burden because taxes and all other costs are rolled into the prices that people pay for goods and services.
Almost, but not quite, correct. Or rather, it’s correct but not sufficient.
Economists of all political stripes have agreed for over a century that the burden of taxation (what they call ‘tax incidence’) falls on three groups of people. The only argument has been about the percentages. That’s to say, how much of the tax burden falls on each of the three groups.
The three groups are:
1) Shareholders. Corporate taxation reduces the amount that can be paid to shareholders as dividends.
2) Employees. Corporate taxation reduces the amount that can be paid to employees in pay raises, bonuses, holidays, and so on.
3) Customers. Corporate taxation reduces the company’s ability to sell its products to its customers at lower prices.
As I said, this is not disputed. The only argument has been to what degree the tax burden falls on each of the three groups.
Foreign companies don’t pay tarrifs, the entity buying the product pays the tarrifs.
There is an issue in the UK that with PAYE employees don’t actually see the income tax taken off them, they see the 35p and that *is* their pay. They don’t see the £1 and the 65p taken off them.
This is also why people complain about Council Tax more than income tax. They have to actually physically write a cheque (or set up a direct debit) to pay their Council Tax, and they see it physically disappearing from their bank account. They never see their income tax disappearing from their bank account, because their pre-tax wages never goes into it in the first place.
Fraser: Mathematically, with two zero points there is *at least one* point between the two which is a maxima. The intervening curve could be an M with two maxima. It could be n/\ with two. It could be mmMMmmMmMmm with several maxima, most of them lower than a smaller number of higher maximas.
And why maximise tax take anyway. If the government can run on £5bn, and the maximum you can squeeze from the economy is £10bn, why on earth take £10bn? You only need £5bn.
jgh
Foreign companies don’t pay tarrifs, the entity buying the product pays the tarrifs.
But they do. They are the ones writing the check. Now I imagine what you mean is “ultimately” the consumer pays the tariff. Which is true, but it is misleading. After all the consumer also pays for the factory it was made in.
GregWA
How do corporate taxes fund the American economic system? If anything, they fund something (government) that decreases economic activity.
I appreciate your sentiment, and I think our hearts are in the same place, but this is greatly overstating the case. Taxes pay for things like courts and police and roads and air traffic control and military defense and ports. All these things are essential to a successful functioning economy, and taxes pay for them. For sure, many of them could be privatized, but they aren’t, and for sure they all can’t be. It is hard to imagine an economy thriving without courts to enforce contracts and police to prevent criminality. Want to see what happens if we don’t have police? Check out America in the summer of 2020.
The US has the same – payroll deductions so that you never have to actually PAY your income tax if you are an employee. It is just all gone by the time you receive your pay stub.
And this is actually one of the drivers of the US Democrats’ push to end “contractor” status and switch everyone possible to “employee” status. (See Uber, et al.) Contractors make their own tax payments – or, don’t make them, as the case may be. Tax compliance is always much higher for employees subject to mandatory withholding.