The only tax that doesn't have a Laffer Curve ...

To sum up the series so far, we could get rid of the two worst taxes of all, VAT and Employer's National Insurance (which currently raise about £110 billion between them, four times as much as corporation tax and nearly as much as income tax), and because of various knock on effects, post-tax incomes in the productive sector (i.e. returns to employees and shareholders) would go up by £100 billion and state revenues would only fall by about £30 billion. Maybe my estimates are a tad optimistic, but it would seem that net incomes would go up by at least double the amount of the tax cut (let's say plus £80 billion as against a £40 billion fall).

I refer to this as the "Laffer Rainbow" (because that is what it looks like on a graph). So then we arrive at a situation where the only tax on economic activity is a flat income/corporation tax (the second least bad tax). If we were to cut that, the increase in economic activity and post-tax incomes would be rather more than the amount by which the tax is cut, but (say) sixty per cent of that increase would merely flow through into higher rents/mortgage payments.

So the Laffer Rainbow applies here as much as anywhere else; the tax cut merely leads to a corresponding increase in other taxes, the 'tax' in this case being the ground rent of land. (Private land-ownership being the flipside of, and entirely dependent on the existence of, the state; you can't have the former without the latter - under the Normans this was simpler to envisage - land-owners and the state were exactly the same people).

In other words, if you happen to already own your home or business premises, your disposable income would increase by £12,500 for every £10,000 of tax cut, but if you are a tenant or are yet to buy a home (which is every future generation, glossing over inheritances), your disposable income after housing costs would only go up by £5.000. I personally don't think that this is A Good Thing. And the only tax that would constantly level up the playing field is a tax on those rents, to be redistributed as a universal benefit or citizen's dividend (which was Tom Paine's idea two centuries ago).

Among Land Value Taxers, there is a heated debate between those who want to charge a tax on the annual rental value (and they seem to have the upper hand) and those like me who would prefer to see a tax on capital values. Firstly because this is far easier to understand and calculate (HM Land Registry have quite enough data on plot sizes and selling prices as raw material, the rest is number-crunching). Secondly, because it acts like a higher interest rate and keeps land values low and stable (so no credit crunches to worry about etc.). Thirdly, because such a tax does not have a Laffer Curve - there is no percentage rate above which receipts would start to fall again. Click to enlarge:

For example, the UK has a lot of taxes on land and properties (such as Council Tax, Business Rates, Stamp Duty Land Tax, Inheritance Tax, Capital Gains Tax and so on), these average out to about 1% of residential property values or 2% of commercial property values. If you strip out the bricks and mortar etc, that would be rates of 3% and 6% on site only values (call it 4% for sake of argument). If we doubled the rate to 8% (over the period of a few years, of course!) and applied it to the future market value, receipts would not double, of course, because it would act like a higher interest rate and depress capital values by a third, and 8% x 2/3 is less than 2 x 4% x 1. For every 1% increase, the additional receipts would be less and less, and receipts would be much the same whether the rate is 20% or 50%. At this stage, you do not need to worry about the rate increasing any further, even if they were daft enough to try it.

(Twenty per cent on capital values sounds like a lot, because at current market values, the value of an average residential plot in the UK is about £100,000. But a twenty per cent rate would depress that to £20,000, so the tax raised would be £4,000. The theoretical First Time Buyer wouldn't care too much, because his annual mortgage payments would be £4,000 less than they otherwise might have been (and he'd have no Stamp Duty Land Tax or Council Tax to pay). And if a First Time Buyer can afford it, then existing owners would be able to afford it as well as they have smaller mortgages and higher incomes. Pensioners, for the zilionth time, would be allowed to roll up the tax to be redeemed on death (which is why Inheritance Tax would have to be scrapped as a quid pro quo.)

The only way that the government could increase receipts is by doing what it's supposed to do, i.e. making the UK a nicer place to live and to do business, which is primarily cutting taxes, but also focussing on carrying out it's "core functions" to the best of its abilities (and keeping its nose out of everything else). Click to enlarge:

In other words, for every £1,000 cut in income tax/corporation tax, the economy would grow by £1,250 and rents would go up by £750. A twenty per cent tax on capital land values would collect about £600 of that £750 (so total tax revenues only go down by £400) but without any distorting effects on the economy, and could be used to a) cut income tax/corporation tax even further; b) cover the cost of the core functions of the state and c) be redistributed as a citizen's dividend.