There are those confused enough to deny that the Laffer Curve exists. Which is only the idea that tax rates can be high enough to reduce the amount of tax collected. Note the “can” there, along with the equal point that tax rates can be low enough that revenue can be increased by raising such tax rates. The implication of this being that we’d like to know where we are with any specific tax - the answer will depend upon that specific tax and the structure of the society surrounding it. That peak rate will be lower in a country where people can avoid income tax by leaving the country than it will be where changing residency doesn’t free from the tax system as one example. So too the revenue maximising rate of a transactions tax will be very much lower than that of a consumption tax, both again lower than an income tax. The EU once found that a financial transactions tax of 0.01% was above the Laffer Curve peak while not even we would suggest that’s the revenue raising maxima for a VAT or PAYE.
But rates definitely can be high enough for us to spot Laffer Effects - that is, the withdrawal of labour which may or may not lead to that reduction in total revenue collected:
Rishi Sunak has been urged to lift “bonkers” tax rules on the size of pensions to stem the tide of over-50s retiring early.
Senior Tories have said the Prime Minister should increase or even scrap the lifetime allowance because it acts as a “perverse incentive” to quit.
Number 10 is attempting to reverse a sharp rise in the number of older people choosing to leave the workforce since the Covid pandemic.
Mel Stride, the Work and Pensions Secretary, has been told to come up with ways to incentivise over-50s to stay in and return to their jobs.
The lifetime allowance currently stands at £1,073,100, having been reduced from a high of £1.8 million just over a decade ago. Pensioners are typically taxed 55 per cent on any earnings they withdraw from their pension pot above that amount.
Highly - and expensively - trained and experienced doctors are retiring when there’s still a decade and more of use in them simply because the tax rates are too high. The obvious answer is reduce the tax rates.
So, let’s do that, reduce the tax rates. The simplest method of doing this is simply to abolish the lifetime limit on pension pots. After all, we like people saving. At that macroeconomic level savings will equal investment and no one observant has been complaining that there is over-investment in the British economy in recent decades.
This is not a political point, nor is it some creation of neoliberal phantasies or anything. This is plain and obvious evidence, like a nose upon a face level obviousness. People are withdrawing their labour because the tax rate upon the income from that labour is too high to produce the incentive to work. So, they don’t.
We would add in some little piece of neoliberalism though. Which is an observation about these tax rates faced by these highly paid professionals and which produce this obvious effect. The combination of taxes and benefit withdrawals produces very similar marginal rates amount the poor. Who therefore also don’t supply their labour - or more of it perhaps - into the market. We are not therefore stating that we should ease off on taxing the rich alone. Rather, we’re shouting that we should lower the tax burden on all in order to make us, in aggregate, richer.
You know, stop taxing people so much that they stop working.