why reducing income taxes works - laffer curves
taxation and 'the rich' - and 'the poor'!
why reducing income taxes works
- laffer curves
A neat little article on the Laffer
curve and the relationships between tax rates, growth
effects and tax returns in relation to Brown the Clown’s
latest class war spasm, increasing basic tax to 50%
for those earning over £150,000.
“Well, it's a textbook example of the famous
Laffer Curve - the idea that beyond a certain point,
increases in tax rates will reduce tax revenue,
as individual taxpayers change their behaviour to
escape the higher rates. In the words of the Institute
for Fiscal Studies, higher income tax rates incentivise
taxpayers to "work less, retire earlier, emigrate,
contribute more to pension or charity, convert income
to capital gains, incorporate, and invest in tax
avoidance".” [Quoted from burningourmoney.blogspot.com]
Laffer chart based on 2009 UK
budget. Image: Institute for Fiscal Studies [IFS]
The Laffer Curve is based on logic
and empiric experience. It is an attempt to estimate
government tax takes from various tax regimes. Logically,
it is obvious that the tax take will be zero if tax
rates are zero, whereas if tax rates are 100%, people
will not bother to work for (declared) wages. In the
graph above, the blue line represents the government
tax take for ever-increasing tax rates if there was
no behavioural response.
As we can see in the graph, whereas
the IFS (Institute for Fiscal Studies) places the
peak of the Laffer Curve for high earners at a marginal
income tax rate around 40%, the government places
it at well over 50%.
The red line is typical of economic
real-world wisdom. But in Britain we have mad socialists
running the government, thus they try to convince
themselves, and the people, that they can go on increasing
the tax rate beyond 40% and still obtain increasing
tax. They do this in order to hide the reality that
their objective is to pander to the envy of their
supporters. The reality, as you can see from the red
curve in the graph, is that government tax income
will actually drop as tax rates are pushed much above
40%. But as usual for socialists, despite economic
damage, dogma and perception trump reality.
Notice that this graph applies
to income tax rates on incomes exceeding £150,000
per annum, no where near the greatest source of government
revenues. Similar curves may be estimated for corporation
tax, value added tax and other regimes subject to
behavioural change, for example how much work your
husband will do for a given return!
See also socialist
‘new’ labour’s hidden extra £350
billion tax just this year.
And three short films on the Laffer Curve (20+ minutes
total) from the Centre for Freedom and Prosperity
and the Cato Institute.
essay by laffer on supply-side economics 
This essay is very well argued
and clear, as long as you can follow numbers.
• This paper serves as a response to a recent
The New Republic article by Jonathan Chait which
criticizes the supply side economics movement and
lays out the typical redistributionist’s case
for raising taxes on the rich.
• While the article refers to supply siders
as “wingnuts,” the tenets of supply-side
economics—low taxes, sound money, free trade,
reduced regulations, etc.—have been adopted
(successfully, I might add) in the U.S. and across
• The best way to help the poor is not to
make the rich poorer, but to make the poor richer.
All Americans as a whole have gotten richer as a
result of pro-growth supply-side policies. The economic
and social gains of the past 25 years—across
class, race and gender lines—speak for themselves.
The irony is that many of the policies promoted
by the Left would hurt the very classes of people
whom the Left professes to champion.”
“Christina and David Romer find that the
effect on real GDP of a tax increase of 1% of GDP
is strongly negative both in the short run and over
time. The effect on GDP of a 1% tax increase is
consistently negative and increasing in the damage
it does over time, finally reaching a maximum negative
impact after 10 quarters at which point real GDP
is reduced by 3%. Yikes! Given that both Christina
and David Romer are faculty members at the University
of California, Berkeley, we can be pretty sure that
the results have not been artificially inflated,
if you know what I mean. Now this is academics,
not political rhetoric. Do you really want to advocate
tax increases, Chait?
Deficits are a consequence of both tax and spending
policies. Sometimes deficits are good, and sometimes
they are bad. If someone could borrow at 3% and,
at equal risk, lend at 10%, that person should borrow
as much as he could get his hands on. But, if the
numbers are reversed, and he could borrow at 10%
and only invest at 3%, then he shouldn’t borrow
anything. How much an individual or a country borrows
depends on the spread. Deficits are neither bad
nor good per se—it’s how the proceeds
from borrowing are used that matters.” [p.5]
Laffer includes an excellent quote
from John Maynard Keynes:
“When, on the contrary, I show, a little
elaborately, as in the ensuing chapter, that to
create wealth will increase the national income
and that a large proportion of any increase in the
national income will accrue to an Exchequer, amongst
whose largest outgoings is the payment of incomes
to those who are unemployed and whose receipts are
a proportion of the incomes of those who are occupied,
I hope the reader will feel, whether or not he thinks
himself competent to criticize the argument in detail,
that the answer is just what he would expect—that
it agrees with the instinctive promptings of his
“Nor should the argument seem strange that
taxation may be so high as to defeat its object,
and that, given sufficient time to gather the fruits,
a reduction of taxation will run a better chance
than an increase of balancing the budget. For to
take the opposite view today is to resemble a manufacturer
who, running at a loss, decides to raise his price,
and when his declining sales increase the loss,
wrapping himself in the rectitude of plain arithmetic,
decides that prudence requires him to raise the
price still more—and who, when at last his
account is balanced with nought on both sides, is
still found righteously declaring that it would
have been the act of a gambler to reduce the price
when you were already making a loss.” [1933
Essay: The Means to Prosperity, section I: The nature
of the problem, p.338, The Collected Writings
of John Maynard Keynes, Macmillan Cambridge
University Press, 1972]
The essay clearly shows the steadily
increasing wealth of the least well off, despite the
[ Link indirectly from Clint Hunter. ]
'Trickle down' is nonsense regularly being used by socialists such as Ed Balls and Ed Miliband to dishonestly claim that the Conservatives will give 'tax cuts for the rich'. This is a variation to the lie told in 1920s USA by Democrats against Republicans. Known as "Trickle down", this lie was not promoted by right-wing politicians, but was developed by a Roosevelt speech writer, Samuel Roseman, in order to misrepresent the Republican assertion that lowering taxes would bring in more tax revenue.
The Democrats claimed that to say that wealth would trickle down to the poor was a capitalist lie. However, the Republicans, and now the Conservatives, were ensuring the greatest amount of tax receipts from the wealthiest, thus most effectively supporting welfare projects. They were following the reasoning of the Laffer curve, borne out by empirical evidence.
"...there were 206 people who reported annual taxable incomes of one
million dollars or more in 1916. but as the tax rates rose, the number
fell drastically, to just 21 people by 1921. then' after a series of
tax rate cuts during the 1920s, the number of individuals reporting
taxable incomes of a million dollars rose again to 207 by 1925. under
these conditions, it should not be surprising that the government
collected more tax revenue after tax rates were cut. nor is it
surprising that, with increased economic activity following the shift
of vast sums of money from tax shelters into the productive economy,
the annual unemployment rate from 1925 through 1928 ranged from a high
of 4.2% to a low of 1.8%."
[Quoted from “Trickle down” theory and “Tax cuts for the rich” , p.5]
The real argument is that lower tax rates lead to greater tax receipts from the very rich, as they are no longer motivated to extend great efforts in avoiding punitive taxes. Thus they tend to stop investing in, say, South America or Poland, and keep the money in their home country.
Most wealth of the really rich is not used by them for spending money, but for investment in factories and the like. Such capital is not about spending money, it is about power and investment. If the factories were sold and the money distributed to the poor, production would be lost and the poor would not become any better off (except temporarily).
While this is currently regularly attributed to Laffer, as 'the Laffer curve', but as you will see above, it was well known to J.M. Keynes and other economists long before Laffer. (To note, Keynes called the Labour Party the "party of catastrophe".)
While the linked article refers to the USA, the situation is very approximatelysimilar in all advanced countries. The USA does have lower overall tax rates, as does Japan.
Britain was anomalous among rich nations until the recent Cameron administration. The strong rise in the limen at which income tax is paid has normalised that.
Remember that personal tax rates produce only about a quarter of the government grab.
"CBO Report: The Rich Pay Most of the Taxes; the Poor Get Checks
"Jane Wells, a business news reporter for CNBC, after reviewing the
latest report from the Congressional Budget Office (CBO) on who pays
income taxes in America, claimed that the rich pay them all. The CBO,
wrote Wells, showed that the top 20 percent pay nearly 93 percent of
all income taxes, while the top 40 percent pay 106 percent of them."
"The CBOs math is straightforward: For the year 2010, the bottom
fifth earned market income wages, business income, capital gains,
retirement income, and so on of $8,100 per person. But they also
received government transfers cash payments and in-kind benefits
such as SNAP of $22,700, leaving them with a per-person after-tax
income of $30,800. Each persons income tax liability in that group?
"For the second lowest quintile, the numbers for 2010 were similar:
income of $30,700 per person, government transfers of $15,200 with
income taxes paid of $2,500 per person, leaving them with an after-tax
income of $43,400
"This government largess must be paid for in some way, and its the
remaining three-fifths of Americans who do the paying, especially the
top fifth. Says the CBO, the average wage earner in the top 20 percent
of all wage earners had an income in 2010 of $234,000, received
government benefits of $6,500 and paid taxes of $58,900, leaving each
with an after-tax income of $181,900."
The rest of the treacle in the article is worth attention.
“Trickle down” theory and “Tax cuts for the rich” by Thomas Sowell
Hoover Institution Press, staple-bound, 2012
Hoover Institution Press, 2012
Essay: The Means to Prosperity, section I: The nature of the problem, p.338, The Collected Writings
of John Maynard Keynes, Macmillan Cambridge University Press, 1972
|Available from gutenberg.ca, and to be found from p.335 of this edition of Essays in Persuasion.
Keynes is one of the
great masters of the twentieth century. He's often
misrepresented under the heading of Keynesianism,
for which see a useful review referenced in the EMU
document. Keynes has a clear-headed understanding
of both money and politics, and understands the difference;
this is rare indeed. Keynes is a pragmatist par
excellence. Any person wishing to gain a down-to-earth
grasp of the political implications of economic factors,
would be well advised to read into this collection
of essays any time that they start to become confused
by theory detached from reality. Keynes may even increase
First published in 1931
(pbk, 1991, W W Norton & Co, 0393001903)
$14.95 [amazon.com / £9.40 [amazon.co.uk]
- Supply-side economics:
- The most effective method of creating economic
growth is by using incentives.