Yes, taxes can be too high


Not exactly a startling revelation I know, that taxes can indeed be too high. But an interesting paper showing quite how low that too high is. What we're interested in here is just the very tippy toppy of the income distribution, the top 0.1%. And while the analysis is for the US there's no real reason to think that it will be any different here.

In a specification that does all this, we estimate a significant elasticity of 0.7 among
taxpayers in the top 0.1 percent of the income distribution.

Well, what does that mean?

Giertz (2009) performs simulations using published tax return data, and his analysis suggests that given the current structure of taxation in the U.S., if the taxable income elasticity is 0.2, the marginal deadweight loss per additional dollar of revenue raised in the top tax bracket is $0.31 and the peak of the Laffer Curve occurs at a tax rate of 78 percent. If the elasticity is 0.8, the deadweight loss caused by raising one additional dollar of revenue from a top‐bracket taxpayer is $6.57, and the peak of the Laffer curve occurs at a tax rate of 41 percent,...

Now note that this is about the top 0.1%: the numbers for the top 10% as a whole don't show anything like the same relationship. 0.7 isn't quite the 0.8 which gives us a Laffer Curve peak of 41%....but then we should also note that here in the UK we are already significantly above 41% anyway. Not just the new 50% band, but there's employers' NI of some 13% to pay as well. So all the talk of being able to get out of our current economic woes if only we'd tax the very rich more won't actually work. We're, for those very high incomes, already over the Laffer Curve switcheroo and into the realms of higher tax rates leading to less revenue.

And isn't that interesting? There is no pot of money that can be grabbed from the rich to fund spending: cuts in spending it will have to be then.

BTW, did you see that Ken Livingstone has proposed a special 80% tax rate on those earning over £1 million? No, I know, not very interesting at all, Red Ken being wrong about economics again.