Part I of my three-part video series on the Laffer Curve is a good introduction to today’s column. It’s a common-sense primer on why there is not a linear relationship between tax rates and tax revenue.
This is not a controversial view. Even Paul Krugman agrees that the Laffer Curve exists.
The debate is over the shape of the curve. To be more specific, most people argue about the location of the revenue-maximizing point. Is it when the top tax rate is 30 percent? 70 percent? Or where?
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But I often try to convince well-meaning leftists that it’s definitely a bad idea to set tax rates so high that governments actually collect less revenue.
That’s not a compelling argument for the leftists who are motivated by spite.
But it does work for others and we’re going to cross the Atlantic Ocean today and look a real-world example involving potential tax increases on “carried interest” and “non-doms.” Here are some excerpts from an article in the U.K.-based Times.
Keir Starmer said in Labour’s manifesto that he would halt arrangements where money made in private equity deals is taxed as a capital gain at 28 per cent rather than at the additional — and highest — 45p income tax rate. Labour said it could raise £560 million for public services by changing the tax system for what is known as “carried interest”, a share of profits from a private equity fund. …The Times has been told that internal Treasury analysis found that the policy could have a “net cost to the exchequer” because wealthy individuals could choose to leave the UK rather than pay the money and deter investment. The cost could rise to as much as £350 million a year after five years. …
A government source said: “We are absolutely in the revenue raising maximising space rather than doing things for ideological reasons.” …Rachel Reeves, the chancellor, is also reassessing a key manifesto commitment to crack down on non-dom perks after being warned that her plans might not raise any money. …Andy Haldane, a former chief economist at the Bank of England, had questioned the plan’s effectiveness. “Is this really garnering us any extra tax revenue? …Does that make it more or less likely people will park their money, set up businesses here and therefore generate growth?”
Congratulations to the unnamed bureaucrats who conducted the internal Treasury analysis. I very much doubt that they have any libertarian inclinations, but at least they recognize that taxes impact behavior. Especially for people with a lot of control over the timing, level, and composition of their income.
Maybe they learned from prior experiences (see here, here, and here) that tax increases can backfire?
P.S. If Kamala Harris wins next month, hopefully some of her crazy ideas will be derailed by similarly sensible people in the U.S. Treasury Department.
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