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,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.

1 comment:

  1. I think that as a species we reached the point where we are witnessing the failures inbuilt within capitalism ..we cannot continue to exploit each other and more importantly our planet ad infinitum ..