But everybody believes the Laffer Curve!


It's always amusing to see those statements, the "discredited Laffer Curve" " the irrelevant Laffer" and so on. For of course the Laffer Curve itself, that zero tax rates raise no money nor do 100% ones, but ones inbetween do with some point being the maximum revenue raising level, is simply a mathematical truism. But what is more than amusing, actually fun, is to look at the proposals of those who make these dismissals of this idea that higher tax rates can lead to lower total revenues: and see that while they don't espouse the idea they most certainly believe it.

As Paul Samuelson didn't quite say about revealed preferences: don't look at what people say they believe, look at what their plans suggest they believe.

The proof is here in a TUC pamphlet. Written by one Richard Murphy. Recommendations 4 and 5 for reducing tax avoidance are that it should be made more difficult for people to leave the country and not pay UK taxes and that it should be more difficult for companies to leave the country and not pay UK taxes. Your views on the justice of such measures may vary but think about what the implication is.

Tax rates are sufficiently high that even the TUC is worried about people upping sticks and simply not paying them. Thus we must change the law to make it more difficult for people to leave. You see? People do change their behaviour in the face of higher tax rates. Thus there is some tax rate at which revenues will decrease as too many people will have left the country.

Why, we might even think that this new found concern for the way in which people and companies can just vamoose is an admission that the TUC's own proposals for yet higher tax rates will take us over the peak of the Laffer Curve into revenue losing tax rates. Unless, of course, we change the law so that they cannot vamoose.

So there we have it. While huge numbers of people keep saying that they don't believe the central concept of the Laffer Curve, that there is some tax rate which will reduce taxable economic activity and thus tax collected, those making that statement of disbelief do seem to act as if they believe it to be true.