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 lead to decreasing tax revenues.
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.
jgh and bobby b
Yes indeed – and it makes no difference if the Social Security Tax (“Contributions”) is from the employee or the employer – as taxes on the employer are passed on in lower wages.
The “Social Security Rate” (taxes on employer and employee – taken together, as they should be) is just over 15% (Federal – there are State “unemployment insurance contributions” and so on) in the United States – and over 30% in the United Kingdom.
It is about 30% in places like Hungary as well – but income tax is much lower there.
France is off the scale – I have seen figures as high as 68% (employer and employee) for France – but that is very hard to believe. The sources I have seen must be miscalculating or leaving out some factors – or France (or rather the French government) has gone insane.
At the other extreme Denmark is Zero Percent Social Security Rate – 0%. Which means talk of the cripplingly high taxes in Denmark is a bit of a myth – income tax is indeed very high in Denmark, but if you are not paying employer and employee Payroll Taxes….
As an historical note – before the First World War there was no Income Tax in France and no Poor Law Taxes either – a government pension system had just been introduced, but it was (unlike Britain and Germany) voluntary.
France used to be a very Liberal country – in the old sense of the word Liberal.
Before the Franco-Prussian War of 1870 France (unlike Prussia) did not have a system of state schools – although the government did subsidize Catholic schools, indeed the war was seen by Karl Marx and Fred Engels as a conflict between French liberalism (in spite of the fact that France, like Prussia, did have CONSCRIPTION and a heavy burden of miltary spending) and Prussian statism (no prizes for guessing they supported the more Collectivist side) – and certainly Bigger Government Progressive ideas seem to have become more popular, around the world, with the French defeat in 1870 – which was wildly seen as proving the efficiency of Prussian statism (just as Frederick the Great was held to prove its efficiency back in the 1700s).
Even in the “naughty 90s” (the 1890s) when both Britain and Germany had Progressive (Graduated) Income Taxes – France had no Income Tax at all, and no Poor Law Tax either.
France is indeed a totally different place now.
Fraser: No, it is not the foreign company that writes the cheque. It is very very definintely the consumer. The foreign companies *RECEIVES* money.
Scenario 1, no tarrifs:
Consumer goes to shop. Product is $80. *CONSUMER* pays $80, foreign company *RECEIVES* $80.
Scenario 2, 25% tarrifs:
Consumer goes to shop. Product is $80 plus $20 tarrif. *CONSUMER* pays $100, foreign company *RECEIVES* $80.
An no point does the foreign company write a cheque for anything.
Now, the foreign company could choose to reduce their prices to $64 to reduce the retail price back down to $80, but that is the foreign compacy *REDUCING* its income. *NOT* paying anything out. At *NO* point does a foreign supplier write a cheque to the government of the purchaser’s country.
jgh:
Technically, this is only true when the function is continuous. A function that maps irrational numbers to 0 and rational numbers to the denominator of the lowest-terms fraction representing the number has no maxima between any of its zero points.
Of course, the context is tax rates, and I’m pretty sure governments can’t set tax policy to make revenue fit that function. That doesn’t make my correction false, merely irrelevant (yes i know that is not an improvement i am making a joke). Besides, I bet some politicians would like to try…
@jgh
Fraser: No, it is not the foreign company that writes the cheque. It is very very definintely the consumer. The foreign companies *RECEIVES* money.
You are mistaken. Tariffs are collected by Customs and Border Patrol at the point they transit into the US, and similarly in other countries. How it works is that the goods arrive at customs at a port of entry. There they are classified (usually by the importer, though CBP can review) and based on the classification the importer pays CBP the appropriate tariff. You can see this writ small in the airport. If you bring in more goods, alcohol for example, than the duty free limits, you’ll have to pay a duty to CBP right there at the airport. They accept all major credit cards. It is why customs at the airport has a green and a red lane. The “goods to declare” they are asking about is not for informational purposes, but so that they can charge you a duty on anything above the personal use limits.
The importer is usually not the manufacturer, so when the manufacturer contracts with the importing company they will pay them (that is to say, write a check) for the freight fee and the customs duty, which in this case would include the tariff.
Nonetheless, the consumer price certainly will have that baked in, just as it has corporate taxes baked in. Which is why I think there are significant similarities between the two.
This is correct. Whilst there may be certain circumstances, and so on, those are rare and not worth of discussion.
If I have to pay 10% more, I’m passing it on to you as the consumer. It’s that simple. No need to do any nuance on it.
(the brilliant bit is that I get to pass on 10%, and take the extra £ note extra, and watch you all cry about inflation)
In 2011 or so, the Vat rate went from 17.5% to 20%.
At the time, I was working for a large, uh, “catalogue based retailer” of the “book of dreams” variety.
We did NOT swallow the extra 2.5%. You did.
jdh – to remain competitive in exporting to the United States the Chinese company, in your example, would have to reduce its prices by 20 Dollars – as customers are only buying the Chinese made goods because they are less expensive.
So the Chinese company is paying the 20 Dollar tariff – in order to keep the price of the goods in the United States at 80 Dollars. Otherwise American customers would buy American made goods for, say, 90 Dollars – and not send 80 Dollars to China.
The Economist magazine, and other establishment sources, have a financial interest in NOT understanding this.
The alternative to tariffs is NOT, as the international establishment assume, “free trade” with the People’s Republic of China Communist Party Dictatorship with its military (yes military) objective of crippling American manufacturing – and the Western world generally.
The alternative to tariffs (i.e. gradually weaning Americans off Chinese made goods) would be to BAN imports from the PRC.
“Free Trade” with this totalitarian regime and its “private companies” is military suicide.
People who are against tariffs on goods from the PRC do not seem to grasp that the only logical alternative is to ban imports from this regime.
“But American government policy since President Nixon has been good relations with the People’s Republic of China Communist Party Dictatorship”.
That is because American government policy is slow motion suicide for the United States and for the Western world generally.
That’s pretty much my position, it’s like blaming the incoming flood of elephant’s toenails.
@neonsnake
In 2011 or so, the Vat rate went from 17.5% to 20%.
Many years ago when I still lived in the UK I ran a small business that was VAT registered, so I’m pretty familiar with how VAT works. If I remember right it was 15% at that time, but I might have that number wrong. But the business absolutely pays the (net) VAT to the government. I remember filling in the annoying form, quarterly probably? I don’t remember. Of course it got passed on to some degree to the consumer (and you deduct VAT charged to you by your suppliers — which is of course a bookkeeping nightmare.) I hated writing those cheques.
So the VAT is baked in to the price, but tariffs and VAT do not negate the laws of economics. The price still determines demand, and so if the price goes up demand goes down. This often means that the producer has to absorb some of the cost to adjust the price to the one that produces the most overall profit. As I’m sure you know the science of pricing has as its goal maximizing not the marginal profit per sale but maximizing the total goods sold multiplied by the marginal profit per sale. So a lower price can often produce more total profit (which has interesting parallels to the Laffer curve). So it is more complicated than saying “the consumer pays the tariff”.
Nonetheless, this just further emphasizes the point I am making which is that all these extra government imposed costs whether tariffs or corporate taxes have a similar effect on the consumer or B2B price. And since foreign producers don’t pay US or UK corporate taxes there is a certain sense of fairness and leveling the playing field associated with it.
My preference of course would be to have neither, but if you have one I can see the symmetry in having the other.
What if the consumer has been buying your product because it’s been 5% cheaper than your competitor, who doesn’t have to pay that new 10%?
Here’s the proper use of tariffs:
https://x.com/Eric_Schmitt/status/1883586016185024940
It worked. Colombia backed down in one hour.
Tariffs aren’t “tax collection.” Tariffs are behavior-modification devices.
Seems to me that most of the criticism of Trump’s tariffs are coming from people who talk like this is the first time they’ve heard of this guy Trump. Do they think he believes everything he says?
Yes, he’s talking “YUGE” tariffs, but let’s see what he does, let’s see the end game before judging his performance.
As bobby b points out here at 7:54pm, tariffs are behavior-modification devices. I think of them as threats, threats no one wants to follow through on.
But unless Trump comes across as an economic dimwit who thinks tariffs will fill the coffers of his “External Revenue Service”, unless China, Canada, Mexico et al. think he’ll do it, it’s not really a threat. What’s so hard to understand about how one makes a threat credible when its something that not many people think is a smart thing to do?
Now, I could be wrong and Trump imposes crazy high tariffs and prices go up, supply chains are disrupted, and the US economy is hurt. But I don’t think so.
Or I could be wrong about the economic impacts of tariffs…much more likely.
Is my take on this wrong?