Thursday, 23 April 2009

Higher rate tax: the old ones are the best ones

Ever since Arthur Laffer sketched a curve on a napkin demonstrating that increasing taxes beyond a certain point reduces tax take (because of avoidance and impact on enterprise incentives), it has been an article of faith among right wing politicians and commentators that increasing taxes for the wealthy is a mad and counterproductive idea. Here's today's example. Who was at that meeting where the napkin became an unlikely prop? None other than our old friends Dick Cheney and Donald Rumsfeld. Hmmmm......interesting that my last post was on torture and the lies told by the Bush administration about it.

Of course, far from economic fact, the Laffer Curve is economic theory- its shape and nature far from determined- and highly disputed at that. If there is 100 per cent tax then of course people are going to avoid tax. It doesn't follow that if tax is 50 per cent above £150,000 that they will too. The reality is we just don't know but we'll find out next year.

The Institute of Fiscal Studies has been quoted ad nauseam in support of the neo-liberal case over the last few months. I thought it might actually be worth digging out what they said in reality- just for originality. Here is the key quote (quoted here):
There are also considerable uncertainties in forecasting the underlying pre-tax incomes of the very rich in 2011-12 given that the latest micro-data available on the incomes of the very rich dates from 2005-06, and given that recent analysis showed a close relationship between income growth amongst the very rich and the performance of the stock market, which has been extremely volatile in recent months. These issues, combined with the uncertainty over how very rich adults will respond to higher marginal tax rates, must surely mean that the HM Treasury's estimated revenue yield of £1.6bn a year is subject to an extremely wide margin of error, and the possibility must exist that the measure could lose the government income tax revenue.
Actually, the IFS was pointing to the uncertainty of the tax take from the new higher rate while, admittedly, implicitly accepting that there may be something in the theory of the Laffer Curve. It does not come to a firm conclusion. It's the oldest neo-liberal trick in the book (one that has been parroted by the neo-cons- back to Cheney and Rumsfeld again): take a theory, turn it into a law, and never feel you need to have even the briefest flirtation with reality.

It would in fact be very surprising if this new tax didn't raise revenue. But we'll see.

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