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Thursday, November 29, 2012

The wrong side of the curve

The UK discovers the Laffer Curve matters:
In the 2009-10 tax year, more than 16,000 people declared an annual income of more than £1 million to HM Revenue and Customs. This number fell to just 6,000 after Gordon Brown introduced the new 50p top rate of income tax shortly before the last general election. The figures have been seized upon by the Conservatives to claim that increasing the highest rate of tax actually led to a loss in revenues for the Government. It is believed that rich Britons moved abroad or took steps to avoid paying the new levy by reducing their taxable incomes.
Anyone who believes in the myth of human progress has to have their faith shaken by the total inability of governments to grasp the concept of cause and effect despite literally thousands of years of historical evidence upon which to draw.

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62 Comments:

Anonymous Anonymous November 29, 2012 3:59 PM  

HAW HAW!!

Anonymous Boetain November 29, 2012 4:03 PM  

I like this...two recent posts regarding the Laffer Curve. Vox may become a Wanniskian yet.

Anonymous JartStar November 29, 2012 4:14 PM  

Obviously the solution is to raise the rate to 91% and pet a cat.

Anonymous BAJ November 29, 2012 4:14 PM  

I believe in human progress. Just look at the series "The Ascent of Man" by Jacob Bronokowski as confirmation of this belief. Humans strive to develop, but the governments stifle progress at every opportunity.

Blogger Beefy Levinson November 29, 2012 4:15 PM  

"People respond to incentives." Everything else written about economics, finance, and fiscal policy is commentary.

Anonymous Josh November 29, 2012 4:17 PM  

Insert Serge ranting about how taxes increase the demand for money and rich people are evil...

Anonymous Daniel November 29, 2012 4:25 PM  

Well, let's see, human brains are measurably smaller than they were in the stone age, and continue to shrink. Governments have gotten larger and more interconnected.

I'm pretty sure there's a Laffer Curve for the survival of man, and government, too. The only question is if men will become too stupid to live before government becomes to large to allow for petty annoyances like breathing citizens.

Either way, in banking parlance, it is considered a Win-Win.

Anonymous Rock Throwing Peasant November 29, 2012 4:51 PM  

The unasked question, "What millionaire will move to a land of such tax rates?"

It's one thing to argue about tax rates chasing existing millionaires out. It's another to contemplate the incentive to move money into a country that can confiscate so much of it "legally."

Maybe this is a facet of the Laffer Curve not discussed often enough. I tend to see taxation in terms of the current, in-nation, tax base and not what could potentially move toward a nation with an attractive tax rate. It is brought up when discussing the corporate tax rate, but not as much with income tax rates.

Anonymous rycamor November 29, 2012 4:54 PM  

Well, let's see, human brains are measurably smaller than they were in the stone age, and continue to shrink. Governments have gotten larger and more interconnected.

Well of course they shrink. Physical skills required a lot of brainpower that is no longer necessary in this age of office drones and smart phones. Not to mention, it has been shown that lack of serious exertion leads to brain shrinkage.

Also, as I recall, more recent studies on genetics suggests that genes are not quite as set in stone (at birth) as we used to think. Apparently the choices we make in life do somewhat affect the attributes we pass off to the next generation. Sobering thought...

Anonymous Porky? November 29, 2012 4:59 PM  

Why don't they just build a wall?

Blogger Joshua_D November 29, 2012 5:01 PM  

BAJ November 29, 2012 4:14 PM

I believe in human progress. Just look at the series "The Ascent of Man" by Jacob Bronokowski as confirmation of this belief. Humans strive to develop, but the governments stifle progress at every opportunity.


Since "the governments" are made of humans, I think you need to clarify your point. You're essentially saying, "Humans strive to develop, but humans stifle progress at every opportunity."

Anonymous DT November 29, 2012 5:10 PM  

Since "the governments" are made of humans, I think you need to clarify your point. You're essentially saying, "Humans strive to develop, but humans stifle progress at every opportunity."

Humans aren't equal. Those who strive tend to sort themselves into the private sector, while those who stifle tend to sort themselves into the public sector. Their tendencies are then reinforced by the people around them.

Anonymous JI November 29, 2012 5:15 PM  

Well, clearly those people must be forced to remain behind and pay their taxes. And, if they try to pull any funny business like working less, being less creative, less entrepreneurial, then they must be punished.

Anonymous Salt November 29, 2012 5:25 PM  

I brought this up to a bunch of liberals and their response was to the tune of why would someone give up profit? Why would someone give up so much over a few % points of profit? They can well afford it. Besides, to whom much is given much is asked.

The liberals / leftists / communists / whatever just don't get it.

Anonymous Noah B. November 29, 2012 5:25 PM  

I would love to see some data regarding how many individuals in the US paid at the 91 percent income tax rate while it was in effect. I'm guessing that not many people actually paid at those rates.

Blogger ajw308 November 29, 2012 5:32 PM  

I also see talk about a 1.5% wealth tax and have heard that our 401(k)'s may be taxed after all (despite all the promises not to).

I've kinda suspected for years that the politicians wouldn't be able to keep their hands off all that untaxed wealth just sitting there. It's like squirrels and squirrel-proof bird feeders. They'll just spend all their time trying to get in till they succeed.

If you stop thinking of them as public servants and think of them as just the biggest most powerful gang in the land, their behavior makes more sense.

Anonymous Mudz November 29, 2012 5:32 PM  

I know absolutely nothing about economics. But this Laffer Curve sounds like something I learned from playing SimCity 4. Maybe the government doesn't play enough sims. :D

Anonymous fnn November 29, 2012 5:46 PM  

The Flynn Effect is a myth-it looks like we've been getting dumber for at least 200 years:
http://charltonteaching.blogspot.com/2012/11/the-over-promoted-society.html
"I am now pretty much convinced that average and peak general intelligence (g) has been declining in the West for at least the past 200 years - and the rate of decline is at least half a standard deviation (circa 8 IQ points) per fifty years."
(...)

Anonymous scoobius dubious November 29, 2012 5:51 PM  

Why would they do that? Just look at all the glorious things they're paying for with their taxes! Why, there's... immigrants, and... transfer payments to immigrants, and... programs to help immigrants settle the rest of their family, clan and village in UK, and... programs to harrass and incarcerate people who complain about immigrants... and, programs to plan on what to do now that their Navy has been gutted in order to pay for immigrants.

Such a deal!

"Besides, to whom much is given much is asked."

I missed the part where they were given anything.

If much should be asked, it should be asked of the immigrants. After all, they just got handed an entire country, on a plate, for free.

Anonymous stats79 November 29, 2012 6:06 PM  

fnn@5:46

I like Charlton. He is an interesting writer. But like most evolutionary theorist he has a penchant for just-so-stories that play to his prejudices. The lone study that he seems to base this entire theory on is a reaction time test that was given in the 1800s by Galton. He never discusses the particulars of this study nor the multiplicity of contrary interpretations.

Half-cocked he spins this off into a number of other dubious conclusions. For instance, average I.Q. in England has declined by 8 points every 50 years. Over 30 I.Q. points, or 2 standard deviations, since the late 1800s.

He never shows his work so you have no idea how he got to this extraordinary conclusion. I'm happy that Charlton is something of a Christian now, but his good-enough for government work theories suggest more about the sorry state of academia and evolutionary theorists than any decrease in the average IQ over the last 150 years.

Anonymous BAJ November 29, 2012 6:06 PM  

Since "the governments" are made of humans, I think you need to clarify your point. You're essentially saying, "Humans strive to develop, but humans stifle progress at every opportunity."

Ok ... Entrepreneurs strive to develop but government officials stifle progress at every opportunity. And yes, entrepreneurs are humans and so are government officials, but they have wildly different motivations.

One could wonder whether the government requires human intervention since the concept of the State would exist irregardless of whether people were to serve as its administrators.

Anonymous kh123 November 29, 2012 6:24 PM  

"Obviously the solution is to raise the rate to 91% and pet a cat."

Krugman strokes quite hard and often when contemplating economic issues.

Anonymous kh123 November 29, 2012 6:30 PM  

"What millionaire will move to a land of such tax rates?"

Sounds like the intro to a Sumerian or Tolkien epic.

Anonymous Godfrey November 29, 2012 6:33 PM  

If we just keep pounding, reality will give way!



Anonymous TheExpat November 29, 2012 6:52 PM  

The unasked question, "What millionaire will move to a land of such [50%] tax rates?"

French rich escaping a 75% tax rate? Not all of them, of course, but I do recall a few articles earlier this year about housing agents in London reporting an increase in that area. Water flows downhill, and all that.

Anonymous Mike M. November 29, 2012 7:19 PM  

I believe in human progress...but you won't get government progress until you show the lawyers the door.

Anonymous Bugs Baer November 29, 2012 7:20 PM  

Isn't this just the occasion for a good ole bronx cheer? I mean, not that one needs an occasion.

Anonymous Milk and Cookies November 29, 2012 7:26 PM  

It's Science!

Blogger tz November 29, 2012 7:27 PM  

What is the 'inverse function' of "California, here I come"? Arizona, and even Colorado, and I suspect even Michigan (remembering the TV ads when I was in San Diego) will run ads.

or Illinois, though they weren't as explicit with a vampiric ballot measure.

Someone once built docks at the CA border. His only mistake is that they will be virtual - financial.

Perhaps we can sell it to Mexico, I don't think it would cost much and it would be in line with Aztlan or whatever it is called.

Do you know what is good about California? I don't either. Well, maybe the climate. But would you allow yourself to be constantly raped for that (sorry, I know you use airports :).

Anonymous Boetain November 29, 2012 7:46 PM  

Humanity has been getting dumber ever since Adam and Eve. For example, there were zero atheists back then.

Anonymous Tad November 29, 2012 8:09 PM  

@TZ

Then of course there is the reality about California: http://www.nytimes.com/2012/11/28/us/california-shows-signs-of-resurgence.html?pagewanted=all&_r=0

Anonymous Tad November 29, 2012 8:11 PM  

@Mike M.

I believe in human progress...but you won't get government progress until you show the lawyers the door.

Until you need one....Always the same.

Blogger Doom November 29, 2012 8:18 PM  

What many 'conservatives', real liberals, and even neo-liberals fail to understand is... cutting revenues is precisely one of the intentions of the forces and some/many people's and groups who advocate this. The shutting down of jobs, the killing of industries, the chaos of the markets, even the riddance of the wealthy (one way or another). It is a goal to and in itself and I believe that is more true than any other publicly or privately held or personal claims or beliefs. Actually, I think anyone who doesn't understand that aspect of it is a fool or blind. It sort of makes for agnosticism amongst the secular, somehow. Then again, socialism is a religion, so it figures.

It's sort of like us doing God's will is really God's wish, heaven is... just a place where the self selective will end up. Too many think heaven is the goal, not just a step on the path (and not even the final one, if you believe in a new earth). But, whatever.

Anonymous Noah B. November 29, 2012 8:47 PM  

"Then of course there is the reality about California: http://www.nytimes.com/2012/11/28/us/california-shows-signs-of-resurgence.html?pagewanted=all&_r=0"

Things are really improving in Detroit, too. There are plenty of construction jobs demolishing housing for those who want to work, the scrap metal business is booming, and an abundance of urban game is helping many cash-strapped Detroit residents make ends meet. With the area rapidly depopulating and many formerly residential areas being put to use as farmland, the future looks promising.

Anonymous zen0 November 29, 2012 8:48 PM  

Tad November 29, 2012 8:09 PM

@TZ

Then of course there is the reality about California: http://www.nytimes.com/2012/11/28/us/california-shows-signs-of-resurgence.html?pagewanted=all&_r=0


Check the rules Tad. A link is not an argument.

Plus, your an idiot.

Anonymous antonym November 29, 2012 9:07 PM  

Whether or not humanity has progressed depends on how you measure progress. Our standard of living has certainly improved. Some would say our morals have improved...

Anonymous zen0 November 29, 2012 9:11 PM  

Hey, never mind the rich people's woes. The Alternative Minimum Tax is not inflation adjusted, and has been increasing every year, as lower and lower income families are hit with it. Not only that, exemptions for 2012 are not yet forthcoming.

Now if they go to a serious VAT tax as well, the lower classes may start having to adopt anti-tax strategies. Meanwhile, the PTB distract everyone with the greedy rich narrative.

Where there are a lot of sheep, there is a lot of fleece.

Selah.

Anonymous antonym November 29, 2012 9:25 PM  

Wouldn't a Christian have to agree that humanity's morals have progressed, if only because Christians are a larger percentage of the world's population than they used to be?

Anonymous zen0 November 29, 2012 9:38 PM  

@ antonym
Our standard of living has certainly improved.Some would say our morals have improved...

Depends how you measure it.

Wouldn't a Christian have to agree that humanity's morals have progressed, if only because Christians are a larger percentage of the world's population than they used to be?

No.

Anonymous antonym November 29, 2012 9:41 PM  

Why not?

Anonymous zen0 November 29, 2012 9:51 PM  

Its irrelevant to the post, for one. Save it for an appropriate topic.

Anonymous noddy November 29, 2012 9:55 PM  

Surely it would be just a little simplistic to believe that governments raise taxes to increase revenue, when history keeps repeating that it doesn't serve that purpose? The smarter conclusion is that they do it to serve a different purpose - one that history does support.

Namely, that raising taxes to the point where only a few thousands are seriously affected always goes hand-in-hand with making lots of noise about 'whose side you are on'.

Politicians have always been quick to wear someone else's head on a pike to show what jolly good fellows they are to the masses - the price of a few lost millions in revenue is well worth the candle.

Sometimes I wonder what planet you are on Vox.

Anonymous zen0 November 29, 2012 10:43 PM  

Politicians have always been quick to wear someone else's head on a pike to show what jolly good fellows they are to the masses - the price of a few lost millions in revenue is well worth the candle.

Did you miss zen0 9:11? Its a watch the birdie, sleight of hand thingie.

Falling for the obvious should work with the rabble, but you have apparently self-identified with a more superior type of intellect. Maybe you are mistaken.

Anonymous Anonymous November 29, 2012 10:50 PM  


Anyone who believes in progress in the financial world needs to read "Popular Delusions and the Madness of Crowds" by the 19th century author Charles MacKay. Pay close attention to the tulip mania, the South Seas bubble and the Mississippi bubble.

Anyone who believes in a central bank needs to find a copy of "Manias, Panics and Crashes" by Charles P. Kindleberger. How many here can explain how Central European banking practices triggered the US Panic of the 1870's?

There is evidence that median IQ is actually decreasing...

Borderline Anonymous

Anonymous zen0 November 29, 2012 10:58 PM  

How many here can explain how Central European banking practices triggered the US Panic of the 1870's?

The depression began with a building boom in Europe, with rapid building construction taking place in Vienna, Paris and Berlin.

Mortgages were easy to get and large British banks happily made loans to developers. Mortgages were also available from new savings banks designed for the middle-classes. Some of these may have been dodgy. People even used half-completed buildings as collateral because credit was so easy to obtain. This created a housing bubble.

The crisis hit when Russia and Central Europe couldn’t compete with American exports of wheat and other crops, including kerosene which undermined the use of rapeseed oil for cooking. Banks no longer wanted to lend so easily. Eventually the stock market in Vienna crashed and the crisis spread to Western Europe.

Before this the United States had seen an era of unprecedented prosperity. Housing and construction boomed. Shops were full of customers. Prices of commodities reached new levels.

America became affected when the inter-bank lending rate shot up. The country had seen a boom in railroad construction financed mainly by large banks, such as Jay Cooke & Company. They had created complicated financial instruments little-understood by investors to finance the railroads. Eventually this became impossible to sustain. Railroad companies went broke and large banks failed. Jay Cooke’s inability to pay its debts led to the stock-market crash of 1873, which is often called the Panic of 1873. The stock market closed for ten days as Wall Street attempted to deal with the problems.

The crisis helped end the Austro-Hungarian Empire. It also affected America very severely, even rivalling the Great Depression in its harshness. More than 100,000 businesses failed after the Panic of 1873. Railroad construction was curtailed and building and manufacturing declined. Mass unemployment (unemployment reached 14%), demonstrations, and strikes beset the nation. In 1874 thousands of unemployed demonstrated in New York’s Tomkins Square Park. This was the largest demonstration that had ever occurred in New York. The first general strike in the U.S. started in 1877 when employers at the Baltimore and Ohio Railroad attempted to cut the worker’s wages for the second time in a year. Riots and confrontations with police soon followed and the strike soon spread to the rest of the country.

Anonymous zen0 November 29, 2012 10:59 PM  

Not bad. 8 minutes, with a time lag for watching football.

Anonymous Anonymous November 29, 2012 11:12 PM  

thanks for sharing.

Anonymous Anonymous November 29, 2012 11:45 PM  

Gerald Crabtree vs. James Flynn on the evolution of human intelligence, a reprint from Scientific American with links to the original Crabtree posting in Trends in Genetics.

http://www.businessinsider.com/james-flynn-versus-gerald-crabtree-on-evolution-of-human-intelligence-2012-11

zen0 - good enough, but isn't this serge's cue to inform everyone how a strong central bank could have saved the situation?

borderline anonymous

Blogger LP 999/Eliza November 30, 2012 12:20 AM  

Completely succinct and correct Vox but people are in severe irrational denial.

Locally, it appears that people or some people are too busy celebrating the current administrations reelection. These people, bless their darkened hearts, have no interest in or knowledge of econ, budgets or taxes let alone banking or the EU fiasco.

They are the kinda people with their hand pointing to their mouths saying, "feed me, recessions? depression? Nope, not happening, taxes? who cares, feed me - its owed to me."

Anonymous The other skeptic November 30, 2012 12:22 AM  

Then of course there is the reality about California: California show signs of resurgence

How quaint. Someone who believes the propaganda in the NY Times.

Anonymous dh November 30, 2012 12:44 AM  

The real problem is of course that the UK created incentives to evade the taxes, and that they did not also create disincentives to offset the evasion urge.

There are many ways which government can in fact counter act the inevitable urge to reduce income to offset tax liability - including wealth taxes, taxes on alternative compensation (esp. deferred compensation), expatriation taxes, luxury taxes, capital gains and capital outlays taxes, etc et all.

The fact that the the UK government took no such countermeasures means they never intended for this to work in the first place. It was merely symbolic.

All of his inevitably leads to the proposition that the best taxes are those that are voluntary - sales and use taxes, tariffs and protectionist taxes, etc. The false god of progressive taxation is just that - a goal chased on the wind. Many of my liberal friends and colleagues do not realize that their folly in this, but many are starting to come around.

Blogger James Dixon November 30, 2012 6:37 AM  

> There are many ways which government can in fact counter act the inevitable urge to reduce income to offset tax liability...

And for every one, someone will find a way to counter it. When people don't want to do something, it becomes very difficult to force them to do it and still keep your job as a elected official.

> All of his inevitably leads to the proposition that the best taxes are those that are voluntary - sales and use taxes, tariffs and protectionist taxes, etc.

The point is valid, but even those taxes will be avoided if they're too onerous. It's not like smuggling and black markets aren't a long practiced tradition.

Blogger RobertT November 30, 2012 11:21 AM  

dh
"...the best taxes are those that are voluntary - sales and use taxes, tariffs and protectionist taxes, etc."

These are the most heinous taxes of all - hidden - uncontrollable - forever growing - if you intend to survive, there is no way to strategize around these taxes. You call them "voluntary", but they aren't voluntary, there is just nothing you can do about them. Check out your local voting results whenever a sales tax increase is on the ballot. Unlike income tax, the only way to deal with these is at the ballot box.

Anonymous Tad November 30, 2012 11:30 AM  

@the other skeptic

How quaint. Someone who believes the propaganda in the NY Times.

Even quainter: someone that doesn't understand journalism replied to me.

Blogger James Dixon November 30, 2012 11:47 AM  

> ...someone that doesn't understand journalism replied to me.

There is very little if any connection between the New York Times and journalism.

Anonymous CA ReZident November 30, 2012 11:48 AM  

@Tad as long as anecdotal is allowed: - the strip mall by me now contains only a starbucks and a local grocery store.

Gone:
Leather Store
Barber
Brueggers
Tanning salon (2 months ago)
Dentist
jewelry store
Deli/luncheonette (just closed last wk)
UPS Store

Someone says things are getting better? Seems Legit.

Anonymous Golden State of Confusion November 30, 2012 12:42 PM  

Shopping center near me has had about 50% occupancy for the last 2 years.

But income taxes just went up by another 10% so things will be improving soon. Lol!


Anonymous CLK November 30, 2012 11:28 PM  

(1) lets not make too much out of this laffer curve --- is really trivial. You never know where the peaks are, and its not static. There is ample evidence in the history of US tax rates vs revenue that support both sides of this arguments meaning that its likely not true as tool to predict much. And lets not forget that statutory tax rates and effective tax rates are vastly different things...

(2) the story is not really clear what happened ---

(a) did these people move away to avoid taxes: where could they go to: -- i think that people, especially the rich, are far less mobile than one might guess.

(b) maybe they just made less money or had less taxable income -- don't know the UK tax system but in the US you could bring losses forward to offset future income and thus taxes --- so maybe its just natural after several years of losses that there will be a dip in taxable income as loss are written off.

Anonymous HH November 30, 2012 11:48 PM  

The math is pretty simple - increasing tax rates will increase revenue.

$100k taxable income, 10% rate = $10k
$100k taxable income, 25% rate = $25k

Its the non-mathematical part that makes it hard -- the effect of raising rates on taxable income and behaviors.

I suspect for low income brackets where the majority of income is from wages the laffer curve is a skewed mostly linear curve similar to the the examples above and the peak (if there is even one) is way to the right -- because its there are few ways for taxable income derived from wages to be sheltered or reduced from taxes.

For the higher tax brackets where larger percentage of income is from investments/dividends etc I would not be surprised to see the peak being much lower there is some roundness to the curve as there are more ways to reduce taxable income derived from these sources and the money is typically much more fluid.



Anonymous dh December 01, 2012 9:05 AM  

> These are the most heinous taxes of all - hidden - uncontrollable - forever growing - if you intend
> to survive, there is no way to strategize around these taxes. You call them "voluntary", but they
> aren't voluntary, there is just nothing you can do about them. Check out your local voting results
> whenever a sales tax increase is on the ballot. Unlike income tax, the only way to deal with these is
> at the ballot box.

Of course they're voluntary. Just don't buy it. Mankind survived for 20,000 years without money.

Blogger James Dixon December 01, 2012 1:57 PM  

> ...because its there are few ways for taxable income derived from wages to be sheltered or reduced from taxes.

You've never heard of this thing called overtime, I take it.

Anonymous HH December 02, 2012 4:05 PM  

James:

How does overtime reduce taxes ? ... if anything overtime is taxed at a higher rate than the first 40...

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