It never ceases to amaze me just how many Politicians think that they are Economists. And fail spectacularly in the process. Yes, we all use money. But using a car does not make us automotive Engineers…
The story is this:
England has been descending (Again…) into class warfare and punitive Progressive Tax The Rich policies. Wanting more money, David Cameron and his party coveted. Never mind that being covetous is a sin. Never mind what generations of economics (and equal generations of Political-trial-and-error-and-Error-and-ERROR!) have shown. Never mind that hundreds (thousands?) have trod that path before, with the same failed outcome. No… ‘Economic Justice’ DEMANDED more taxation!!!
Thus were taxes raised. More folks were moved into a 40% rate and the top rate rose to 50%. (per the paper below, some marginal rates rose to 60% as ‘allowances’ were progressively removed).
Now the results are in: Raise Tax Rates, Get LESS Tax Revenue. Per this Fox Business video, a 5% drop in revenues:
One suspects that Mr. Cameron may now be listening to the professional economists who are trying to explain to him what is presently called The Laffer Curve. One can only hope that he listens, and that he whispers in the ear of Obama and the Dimocrats. (The Republicrims are undoubtedly already being upbraided by their more traditional party members…)
The basic idea is not all that hard to grasp (at least, not for those folks who bother to think, even just a little…) You get less of something if you tax it. The more you tax it, the greater the decline in the thing taxed. If that tax is applied to, say, productivity, you get less productivity. If it is applied to incomes, you get less income. Initially, the increase in tax rate (say, from 0% to 5%) has a lower reduction in the thing taxed (say from 100% to 99%) so you end up with about 4.8% of actual tax revenues. Nearer to the middle, you get close to a 1:1 ratio, so raise tax rates from 45% to 50% and income activities decrease from, say 55% to 50%. No net gain in total taxes (but a reduction in total wealth and income creation). At the extreme case, going from 90% to 100% taxation will take income production to zero (who would ever work for the ‘privilege’ of filling out tax forms and no gain?)
The goal of the taxing authority is to find that level of tax rate that yields the most total tax revenue. In England, at least, we now know that level is somewhat less than 50% and perhaps lower than 40% tax rate. (As the system is ‘progressive’ with several rates, the exact inflection point is hidden by the spectrum of applied rates).
For the USA we know that no matter what tax rate is set, the maximum Federal Revenue is about 18%. (We know this from all the screwing around that the Congress has done to the Federal Income Tax rates. As high as 90% in some eras – with a significant depression of economic activity – and much lower in other times. Reagan cut tax rates to below 40% and revenue rose dramatically as economic activity improved.)
As our present Federal Tax Rates are already 35% or so depending on how rich you are (and how much money you toss at tax attorneys…)
is projecting a 39.6% upper rate in 2013. I would speculate that tax revenues will be dropping at that point. ( Remember that there are also STATE income taxes in most States, along with sales taxes on what is spent. For California that is an 11% top income tax and 9-10% Sales Tax – it varies with local added bits. Total of income taxes would be 50.6% THEN you get to pay 10% for anything you buy… And California wonders why tax receipts are down…)
Perhaps we can get Mr. Cameron and Governor Jerry Brown to share a Basic Econ class…
Dear Progressive (taxation) Politicians: Just because you don’t LIKE it, that does not let you CHANGE it.
The laws of economics are as immutable as the laws of nature.
“Reality just is. -E.M.Smith”.
Please learn that. I’m really tired of seeing you all, one at a time, try the same error, over and over, and yet never learning.
Special Attention needs to be paid to the point that ‘removing allowances’ is exactly the same effect as raising the actual rates. No amount of hiding, wiggling, lying about what it is, or redefining things changes the results. Folks notice that working more gets them less, so they stop. Folks find other ways that are not taxed to make the marginal money. They move investments to other places. Sometimes they move themselves.
In the USA today, our politicians are haggling over the tax code (Again!) and part of the “gimmick” they are proposing is the old dodge of dropping rates a little while eliminating MORE in ‘allowances’ or ‘deductions’. They think this will generate more revenue. It won’t.
REVENUE has a max amount and that is very nearly 18% of the GDP. All the “gimmicks” do is to move exactly from whom and how it is collected. Obama has stated he wants ‘only’ 25% of GDP as the Federal Goal. He simply can not get it PERIOD FULL STOP.
The way to get more REVENUE is to grow GDP, then you get 18% of a larger total. That’s why Reagan and Kennedy both cut tax rates and got more total revenue… Economics does not care what party you belong to, nor what your “motive” is. It doesn’t care if you are an “Evil Republican” or a “Nice Democrat”. It works the same for all comers and regardless of motivation. So no, you will NOT be able to raise more REVENUE by playing with rates, allowances, deductions, whatever. 18% of GDP is IT. After that, it’s all about “more GDP”. And how do you get more GDP? You tax the creation of it LESS, not more…
OK, the links:
Here’s the original Adam Smith Institute report. I’ve only read about half of it so far, but it is well worth it just for the historical quotes, if nothing else:
They do an interesting thing, in that they trace back statements about taxation and tax rates through various Known Names of history. While not as ‘direct’ as the Laffer Curve, that presents it as a graphical device, it still shows that this effect has been known from the roots of Economic Theory. I’m going to lift some of their quotes and put them here:
“It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.” Ibn Khaldun, The Muqaddimah, 1377.
Louis XIV’s finance minister, Jean Baptiste Colbert, famously said that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” Colbert’s approach led to the French Revolution. In Britain today many are tired of losing their feathers and are taking avoiding action, moving overseas or beyond the reach of the taxman in other ways.
As Adam Smith said, taxes “obstruct the industry of the people, and discourage them from applying to certain branches of business which might give maintenance and employment to great multitudes.”
“Experience does not show that the higher [tax] rate produces the larger revenue. Experience is all the other way. There is no escaping that when the taxation of large incomes is excessive they tend to disappear.”
“It is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the tax rates… An economy constrained by high tax rates will never produce enough revenue to balance the budget, just as it will never create enough jobs or enough profits.” John F. Kennedy
“Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more-‐-‐and who, when at last his account is balanced with nought on both sides, is still foundm righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.” 1933 Essay: The Means to Prosperity, section I: The nature of the problem, p338, The Collected Writings of John Maynard Keynes, Macmillan Cambridge University Press, 1972
President Ronald Reagan used to describe the days when he worked as an actor in the times of 90% marginal tax rates. After a certain point in the year he and fellow actors just stopped making films. What was the point, he asked?
By contrast, the ten states with the highest tax burden – California, Connecticut, Hawaii, Maryland, New Jersey, New York, Ohio, Vermont, Wisconsin and Pennsylvania – lost around 129,455 residents and $10.2 billion of net-‐adjusted income in 2008 alone. From 1998 through 2008, the ten states with the highest tax burden lost over 3 million residents. These residents took with them a huge $92 billion in income.
This is part of a much larger quote down near the bottom of the paper. The whole of it is worth reading:
If (the reader) understands this, he will realize that the strongest incentive for activity is to lower as much as possible the amounts of individual imposts levied upon persons capable of undertaking enterprises. In this manner, such persons will be psychologically disposed to undertake them, because they can be confident of making a profit from them. Ibn Khaldun, The Muqaddimah, 1377
Can we PLEASE get off this wheel? Have we learned NOTHING in 3/4 of a MILLENNIUM? (and in fact forgotten something from Ibn Khaldun…)
The paper gives many examples of lowered rates with higher revenues. Many countries. Many eras and years. Many cultures. Many political orientations. Well worth the read. A few examples (including India, Singapore, Hong Kong) seem to indicate that the peak of revenues from the Laffer Curve may, in fact, be at lower than an 18% tax rate. Due to the increase in total compliance along with economic activity, there are existence proofs for 15% to 10% tax rates.
The Forbes take on that paper:
A Victory For The Laffer Curve, A Defeat For England’s Economy
Daniel J. Mitchell,
A new study from the Adam Smith Institute in the United Kingdom provides overwhelming evidence that class-warfare tax policy is grossly misguided and self-destructive. The authors examine the likely impact of the 10-percentage point increase in the top income tax rate, which was imposed as an election-year stunt by former Prime Minister Gordon Brown and then kept in place by his feckless successor, David Cameron.
They find that boosting the top tax rate to 50 percent will slow economic performance. And because of both macroeconomic and microeconomic responses, tax revenues over the next 10 years are likely to drop by the equivalent of more than $550 billion. Here’s a key paragraph from the executive summary of the new study.
The country is suffering from a 50%-plus marginal tax rate which even its architect admits was imposed without economic purpose. Now our analysis shows that the policy is set for failure: at best leading to flat growth for a decade and £350bn of lost revenue. The Chancellor should seize the occasion of the 2011 budget to reverse this disaster promptly, for the benefit of public revenues, economic growth, the government’s standing with domestic wealth-creators, and the UK’s reputation with world business.
And a note from 2009 about the motivation for this tax, that sounds remarkably like the stupid rhetoric of the Progressive (tax) parties in America today:
Wednesday, 5th August 2009
Why Cameron should ditch the 50p tax rate
When justifying his decision to keep Gordon Brown’s 50p tax for the super rich, Cameron has recently taken to saying that the well-off must “pay their fair share”. This is worth closer examination. The richest 1% in Britain contribute 24 percent of all income tax collected – it is unclear whether Cameron regards this as “fair” or not. But if he wants it to rise, then it is clear what he should do. Data released last week from America, and picked up by the smarter economics bloggers, gives us a striking example. If he wants to soak the rich, cut their taxes.
So there we have it. Proof once again that some humans are incapable of learning from history and must repeat it. Oddly, those on the Progressive (tax) side seem incapable of learning from either their history nor from their more recent repeats of it. One can only speculate on “why”.
Perhaps they are simply driven by greed, envy, being covetous. Perhaps they are simply too stupid to learn.
Perhaps they know they will not get more revenue, but the sheer Joy of Harming those they despise is what they desire. Like windowbreakers the world over, they are not interested in a positive outcome.
That it has been nearly 700 years (that we have in the easy to find quotes!) that this effect of greater revenues from lower rates has been known; yet we still do not have leaders that recognize it today, is at best depressing. That as recently as the 1980s the Republicans knew it, and that in 1963 the Democrats new it; yet today NEITHER PARTY seems aware of it, or willing to act on the awareness; is worse than depressing.
We have a $1.5 Trillion Deficit per year, $15 Trillion debt NOW, high and structural unemployment, declining Federal Revenues and the answer proposed is Precisely and Exactly WRONG! Do NOT raise tax rates. Do NOT reduce deductions and allowances. Just cut the damn rates to about 18% (which is all you can get anyway) and watch the economy take off, rising employment, rapid growth of economic activity, a flood of money into the economy from abroad, and a giant rise of tax revenues. For bonus points, toss out a half century of accumulated crap in the tax code and make it a flat tax, deduction for home mortgage interest and charitable donations if you must for political reasons. Scrap the rest.
At times I wonder about the sanity of humanity; the rest of the time I’m sure…