A blog on politics and education, supporting socialist ideals and equality of opportunity. Against obscene wealth and inequality.
Monday, 16 June 2014
Laffer curve dead in the water!
With the news that Farage is including the reduction of the
top tax rate to 40% in the Ukip omnishambles that some call a manifesto, and the
ever-present possibility that Cameron will suggest the same for his party,
Labour`s determination to increase taxes on the rich should be greater than
ever. The reasons are obvious, from the need for funding the NHS to helping the
least privileged, from house-building to infrastructure improvements, not to
mention the disgraceful fact, not mentioned by our right-wing media, that in the
OECD league table of equality, covering 34 developed countries, Britain is
positioned 28. There will be, nevertheless, the usual complaints from the
defenders of the rich, that increasing income tax to higher levels than the
present, and derisory, 45% will lead to less funds for the Treasury. Why? The
answer they will quote will be, as always, the Laffer Curve.
Arthur Laffer was a Republican, who stood unsuccessfully
for the American Senate in 1986, but he is more famous for a drawing of a graph
on a paper napkin in an afternoon meeting, during the administration of the
Republican president, Gerald Ford, in 1974, in the company of Dick Cheney and
Donald Rumsfeld. On the graph was a curve which he drew to show how increasing tax rates beyond a certain point would be
counter-productive for raising further tax revenue. It was the Reagan
administration which used the Curve as the excuse it needed to reduce the higher
rate of personal income tax in stages from 70% to 28%. Cameron and Osborne used
it, too, when attempting to justify their reduction of the top rate from 50% to
45%. When Reagan cut the higher rates, the deficit doubled to $155 billion and
government debt tripled to more than $2trillion. His successor, Bush senior, was
forced to raise taxes!
Reason dictates that there will be a point when high
earners, profiteers and capitalists will say enough is enough, but that figure
is nowhere near the Tory figure of 50%; for example, the New Palgrave Dictionary
of Economics reports that estimates of revenue-maximizing tax rates have varied
widely, with an average of around 70%.
Indeed, the economist-of-the-moment, Thomas Piketty, co-authored an article in
2011 which disputed the "claim that low taxes on the rich raise productivity and
economic growth". It said, in fact, that the "optimal top tax rate could be over
80% and no-one but the mega rich would lose out". (Taxing the 1%: why the top
tax rate could be over 80%, published by VoxEU.org,08/12/11) Since then, Piketty
has risen to world-wide prominence with his book,"Capital in the 21st
Century", in which he has argued that the present capitalist system is taking
the developed world back to Dickensian levels of inequality, and that all
incomes in the US over $500,000 should be taxed at 80%.
Now we hear that Labour is considering an increase in
National Insurance contributions to fund the NHS, banking on the assumption that
the party determined to keep the NHS out of the hands of the private sector will
win the election. Admittedly, defence of the NHS is essential , but its funding
has to be on a fairer basis. The working people are too poor already, with many
incomes so low they have to be subsidised by the taxpayer, and the average
earnings around £26,000, a figure based on the inclusion in the calculation of
the earnings of the obscenely rich. The solution is to increase income tax
rates, with a sliding scale, so that the well-off earning over £65K pay 45%,
over £150K pay 50% and so on, with those earning over £500K paying 80%.
As for the Laffer Curve? It was devised by an American
conservative to justify low taxes for the rich; Labour should discard it! It has
been discredited, and Labour should have the bottle to say so.