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what-is-seen-and-what-is-not-seen

As M. Bastiat pointed out all those years ago the difficult part of thinking about economics is the looking for the things which are not seen. As with the recent changes to taxation at the top end of the income scale and more specifically of bankers.

JP Morgan, the giant US investment bank, has warned the Chancellor it may scrap plans to build a £1.5bn flagship European headquarters in Canary Wharf if politicians don’t rein in their attacks on the City.

We can sometimes model the effects of tax changes (and of regulations etc.) on the activities that people already undertake. The opposite results of the income and subsitution effects and possibly the balance: maybe even a close approximation to the actual sum.

But it’s very much harder, near impossible, to work out what would/could have happened without the new taxes and regulations and what will happen. Instead of who will work less or who will relocate out, who would have worked more, who would have relocated inwards, what new businesses will now not be started?

Just as an example, the new top rate of taxation of 50% is estimated by the Treasury to have net income of around £2 billion a year. Others disagree and think it could be less and even negative in its revenue effects. But if those who would have come but now will not, as with this JP Morgan development, are not going to be paying into the UK taxation pot then we’re closer to the tax rise leading to a fall in revenues.

In other words, when we look for the Laffer Curve and its inflection point we need to be looking at not just what can be seen but the potential futures which are not seen.