Thursday, 16 April 2015

The Laffer Curve in action

From City AM:

Corporation tax rates have been falling globally for decades. In 1981, the average rate across the OECD was 48 per cent. It has now plummeted to 24 per cent. In the UK, the decline has been even more stark, with the rate dropping from highs of 52 per cent to just 20 per cent today...

Despite the reduction in the UK’s main rate of corporation tax since 2010 from 28 per cent to 20 per cent, revenues have remained remarkably resilient. In 2013-14, onshore corporation tax receipts (excluding the volatile North Sea oil and gas sector) were £35.7bn compared to £35.3bn in 2010-11.

In the year so far, onshore corporation tax receipts have been 10 per cent higher than over the same period last year – despite a further two percentage point reduction in the rate. The simple truth is that higher taxes do not always lead to higher revenue.

Also from City AM:

Changes to stamp duty in December’s Autumn Statement mean that homes worth below £1m received a tax cut, but those at the very top end of the price scale have to pay a far bigger levy. Under the tax changes, the average London home selling for £510,000 saw its tax bill cut by £4,900. But a property worth £2.1m saw its tax bill rocket by £18,750.

In the first quarter of 2015, there were 638 prime London transactions, down from 949 in the same period a year earlier – a fall of 33.1 per cent. And the stamp duty haul raised from those sales fell from £125m to £93m, down 25.6 per cent.

Of course, this is City AM, so they pretend that corporation tax and SDLT are the worst taxes; they are bad taxes but far from the worst.

So they seldom mention the Laffer Curve as it applies to the worst taxes VAT or National Insurance; the trick here is to look at total tax receipts from all taxes on economic activity. So while a cut in VAT or NIC rates would no doubt mean a reduction in VAT or NIC receipts in isolation, you have to balance that with increased revenues from income tax or corporation tax (the rather less bad taxes).

(With good taxes there is no Laffer effect whatsoever, of course.)


Curtis said...

Using the Laffer curve to set tax rates is a fallacy, the aim should not be to maximise tax revenue but to set the rate at what would be best for the economy as a whole.

Mark Wadsworth said...

C, yes of course, I have been saying that for years. The revenue maximising rate of tax on income or earnings or private wealth is still far from the optimal rate for the economy as a whole. That is implicit in the whole concept.

Unlike LVT of course...