Scotland proves the Laffer Curve once again
48p in the pound is too high as an income tax rate:
A tax hike on high earners in Scotland has cost the public purse about £22 million in a single year, new analysis indicates.
Dan Neidle, a tax policy expert who was part of the Scottish government’s recently axed tax advisory group, said its decision to impose a 48p top rate had instead reduced revenues.
This should not be a surprise. That there is a Laffer Curve - a tax revenue optimising tax rate - is logically obvious. The argument is always over what that rate is. We can also point out that optimal tax raising and optimal growth promoting tax rates will differ and so on. But the existence of a tax rate that is “too high” to maximise tax revenue generation is a certainty. What is it?
The best empirical evidence we have as a fully worked through example is Diamond and Saez. This gives us, in a system with allowances, a curve peak at 54%. This is in a system with “allowances”. So, the ability to switch income types, different tax rates on different types of income and so on. But also in this definition being able to leave the taxing jurisdiction is an “allowance”. So, given the US passport taxation system we’d expect the US peak to be higher than our own. Or that of Scotland’s, where it’s trivially easy to move across the border.
Note though that this is a peak rate for “taxes upon income”. Specifically including employer paid taxes on employment - in the US example Social Security taxes, in the UK National Insurance. So, a 45p rate given employers’ National Insurance is perhaps a little over 54% - so perhaps 40p would be our peak - and a 48p rate is well over it. Thus we see a revenue decline by trying to charge 48p income tax plus other taxes upon income.
Observation agrees with theory. How nice is that in science?
We must also note that there is no “The” Laffer Curve. It depends upon which tax we are talking about. One of us has at least claimed - published the claim too - that a Financial Transactions Tax of 0.01% is over the peak of the curve for an FTT.
As to what we do with this confirmation of our knowledge. Our view is that it is immoral that the poorer be charged income tax. That personal allowance should be at least the full year, full time, minimum wage - if we’re going to have a minimum wage at all. We’d even argue that income tax should only start at median wage or above. We then have this Laffer peak of the rate that can be charged on higher incomes - 40p, perhaps 45p. Government has to then fit into that straitjacket that both morals and reality force upon it.
That’s yer lot, Mateys. Cut government to fit the budget available to you. Everyone else has to so why not the Lanyards?
Tim Worstall