Seriously, in The City?
Listeners to the Today programme on Radio 4 on Wednesday were treated to a knockabout interview with the architect of the Laffer curve: a graph which purports to show that lower tax rates for the rich will lead to higher tax revenues.
It\’s also a theory which has been widely discredited, both on a theoretical level and in practice.
Disproven in theory? What? You jest, you mean proven in theory the argument now being about where the tax rate that maximieses revenues is, that is what you mean isn\’t it?
Because with the Laffer curve – perhaps unusually for economics – we have a historical instance of it being implemented by a direct proponent. Laffer was an associate of the Reagan administration, which had a staged cut in the marginal higher rate of personal income tax from 70% to 28%. The effect on the budget deficit was also striking. Reagan doubled it to $155 billion and tripled government debt to more than $2trillion. His successor, Bush senior, was forced to raise taxes as the deficit doubled again.
What logic! The deficit rise thus taxes collected must have fallen. But, erm, what happened to spending at the same time?
Not all taxes were treated the same. Payroll taxes were increased. So taxes were cut for higher earners while workers paid more.
Ooooh, dearie me. Something to understand about the US system. The payroll taxes pay for social security. This is supposed to be self-financing over the long term, not reliant upon general revenue. Recall all that stuff about the trust find etc? Those Reagan rises in FICA were all about restoring actuarial balance to the SS budget.
You could characterise it the way Burke has done but it would be deeply misleading at best to do so.
The Laffer curve relies on the twin assumptions that the rich create the output in an economy and that they need incentives to choose idleness over work. But there is little evidence to support these hypotheses. On the contrary, economists from Adam Smith to Karl Marx have known that all value in an economy is created by labour.
Erm, incentives to choose work over leisure I think you\’ll find. And this is true of everyone of course, not just the rich.
But I am fascinated: can someone survive as a City economist while still believing in the labour theiry of value?