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this post was submitted on 10 Jul 2024
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Back in the 50s and 60s after WW2 the UK had a 95% tax band for the highest earners. This was due to the country struggling to pay off its debts to the USA after WW2. The Beatles even wrote their song Taxman about it in 1966.
Ultimately there is a problem with these super high taxbands whereby countries that try them will often encounter something called the Laffer Curve whereby overall tax take decreases as the tax rate increases. This isn't even necessarily tax evasion, all it takes is for wealthy people to be suitably motivated to avoid taxes.
In the UK now if your income breaches £100k then you are paying a higher rate of tax on everything earned over that amount but also you lose the £12.5k tax free allowance that all citizens are entitled to. Overall breaching £100k leads to you paying a marginal rate of tax of 60% even if you don't earn much over it. Because of this high earning jobs often let you put money into salary sacrifice pension schemes to avoid breaching the £100k mark. It only becomes worthwhile earning over £100k when you reach the region of ~£130k, which is substantially more. Essentially the system encourages tax avoidance by having this cliff which people who are behaving like rational agents will do anything to avoid. If it were less punative then some economists argue that the government would raise more money.
That's just a bad implementation, then. Tax brackets are progressive for a reason, having a cliff like that should be an obvious no no.
Not to say you don't have a point, because you do, but the govt could fix that particular issue very easily.
That's uh.... pretty fucking dumb.
How the fuck did anyone think a cliff like that would be smart.
It's especially bad with the recent inflation here causing fiscal drag. People are being dragged into higher tax brackets by their incomes rising in line with inflation (if they are lucky) but the tax bands are remaining at their pre-inflation levels so in real terms we are taxed more while earning less.
I think "the cliff" ended up being introduced in better times when £100k was an extremely good salary. It still is a good salary but it seems like when they introduced the policy they were likely thinking that folks earning it were making so much that it wouldn't be worth their while to put the effort into avoiding it. However with recent cost of living challenges the demand for avenues to avoid the cliff rose and employers started to respond by offering schemes like the salary sacrifice pension one I mentioned in order to keep their employees happy.
Edit: There are many ways to avoid taxes such as creating your own limited company, paying for your lifestyle as a business expense and then only paying corporation tax on those expenses (currently 20% in the UK). At the same time you draw a "salary" from your own company which is substantially lower than what you would be getting if you include the expenses and then pay income tax for a lower band. The reason most people don't do this - aside from the obvious moral implications - is that it's usually more effort than it's worth for them. At a certain point though, tax avoidance becomes so worthwhile that the temptation is too great for many to ignore.
You make it sound like a cliff, but you lose £1 of the £12.5k allowance for every £2 over £100k you earn. You don't suddenly lose the whole allowance at £100,001.
That's interesting - I had read it being described as a cliff in various places online where people were discussing personal finances. Double checked now and you are right that it is less of a cliff than I'd thought. Good to know in case I ever get close to that tax bracket!
Oh yeah, those personal finance places all want to talk about the laffer curve, right up until you remind people how high the X value would be. Then, as if by magic, they dont want to talk about them anymore.
To me, those places always seems full of AstroTurfing for the idea of lowering taxes for rich people. There might be some good stuff in there but I would take them main political thrusts made with about as much salt as you can find.
Never ask a man his salary, a woman her age or a neoclassical economist what economic problems tax breaks for the rich won't fix.
To much money to spend on health care?
Tax breaks for the rich.
To little money to spend on healthcare?
Tax cuts for the rich.
Just the right amount of money to spend on healthcare?
Just the right time to cut taxes for the rich.
I think you do lose child care benefits or something at that point (I can't remember, I don't have kids)
Laffer Curve is junk economics from Ronald Reagan's propaganda team. Cannot take seriously any argument that relies on it.
It's not. If you accept that :
Then you accept that between those two extremes there's a tax optimum that for a given rate gives the most tax revenue. This is the Laffer curve.
no, it is propaganda. I mean, "Taxing at 100% also brings no tax revenue" is already a stupid statement, and is Tautologically contradictory, even more so in a progressive tax system (please look up what the even means, statistically believing in the Laffer curve also comes with a ton of other misconceptions about financial policy)
also some history to the Laffer curve, it is an unproven theory that basically always get trotted out by the wealthy to argue for lowering taxes, tho it ironically has been shown to have no predictive power whatsoever.
It's not. If you work 40h per week and can do overtime but that overtime is taxed at 100% (because yes, that's what marginal rate means, it's the rate the extra income will be taxed), virtually nobody will bother doing that overtime. The handful who do will probably not clock-in because anyway, there's no point since it will bring no income after taxation.
you're not very economically literate, are you? overtime pay is not taxed at the marginal tax rate, that's not what that is.
the marginal tax rate is the maximum rate your income will end up at, that does not however mean that all your income is taxed at the rate.
as a very simplified example, assume you have the tax brackets
and you earn $2500, the taxes you will pay are $1000 at 10% -> $100 the next $1000 at 20% -> $200 and the last $500 will be taxed at 30% -> $150
meaning, in this example, you are paying $450 at a marginal tax rate of 30% on $2500. now overtime can bump you up, for example, imagine you work a LOT over those 40h and earn $3200, now you're in the next tax bracket due to your earnings.
also, the whole point is to deny all income above a certain level, or do you really think your boss deserves 3000 times your pay? because he certainly isn't working 3000 times harder than you are.
Oh please explain to me how marginal rates work... 🙄
If your marginal tax rate is already 30% and you decide to earn an extra $1, that $1 will be taxed at 30% and you get $0.70 in your pocket. That's what "marginal" means.
All economic theories are unproven, approximations about how economists think people might behave. There's a reason it is often referred to as the 'dismal science'. Quite often they are based on counterfactuals and projections of what might have happened.
The Laffer Curve is not a rule which always reflects reality but it has explanatory power in certain situations, since logically there has to be a point where avoiding taxes becomes more appealing than paying them.
Regan, et al deploying the theory as part of their political rhetoric - potentially in bad faith - shouldn't discredit the concept itself because doing so would be throwing the baby out with the bath water. It's an ad hominen attack against an economic theory; a bit like saying capital controls are always bad because President Xi in China frequently uses them.
ok, so scientifically speaking "proof" is a mathematical concept only, physics doesn't prove shit, chemistry doesn't prove shit, no other science proves shit.
But economics, like every other science out there makes models, these models when applied to certain circumstances make predictions, we test these models by testing the predictions they make.
The more accurate the prediction the better and more relevant the model, the issue that economics has is that many people instead of looking at the actual science, take the fictional work and claim it reality, mainly because they believe some propaganda commissioned by really wealthy people, to keep their wealth. the Laffer curve is one such example because it allows rich people to invest into lower taxes and increased privatization.
The Laffer curve isn't bad because Regan used it, it's bad because it has a track record of not having any predictive capability.
Also, there exist mechanisms by what we punish tax evasion, taking the likelihood of tax evasion into account for the purpose of setting tax rates is self-defeating, in the assumption that any persons want the maximum amount of money for themselves would always try to evade taxes, no mater what the tax rate is.
I think we agree about the nature of scientific enquiry, how it is all based on inductive reasoning and cannot provide the certainty of mathematics. Additionally, it looks like we agree that the Laffer Curve has been used to justify bad policy in the past.
However, I don't think that the theory has been debunked in the way you are describing. There is broadly a difference of opinion between Keynesian economists who are skeptical of the theory and then Supply-Side economists who endorse it; and then a whole spectrum of views in the middle from Behavioural economists or other schools of thought who are more ambivalent.
Academics who do support the view have done empirical studies over the years that they believe suggest that the Laffer Curve is real, see:
It's a matter of live debate in the field regardless of your opinion of the theory.
sure, you have listed a few papers, and having skimmed some of them I'm a bit iffy to their relevance mainly as to what numbers they take as indicators what of and at least one had an issue where one of the more prominent indicators they picked is heavily influenced by other outside activity more so than the taxes.
but here's the thing, if it was just wrong all the time, it would have predictive power, the fact that it sometimes seems to be correct, and other times it being counter to predictions or being mostly non changing means that it's not a useful model, and a useless model is trash, and honestly I'm highly skeptical of supply side economics, it has produced relatively little in terms of economic stability, nor sustainability.
personally, I'm more inclined towards Post-Keynesian demand side economics, and unlike supply side economics, they have actually made predictive models that actually have predictive power
Funadmentally it makes sense that tax take is 0 at 0% and low (though not neccessarily 0) at 100%, but in practice it only ever used to advocate for lowering taxes no matter what they are set at currently. You never see people talking about governments being on the left side of the Laffer curve and therfore we should raise taxes.
There's also no evidence that I'm aware of that the curve is smooth, single peaked or even single valued and it is also likely highly dependent on myriad other factors, in short it's effectively useless except as a rhetorical device for small-staters to advocate slashing taxes and public services.
Shoot whoever wrote that bill. (Metaphorically)