There is one economist regularly mentioned by those calling for lower rates of tax for the super-rich, and that is Art Laffer. Laffer argued that higher rates of taxation could cause government revenue to fall as people work less as they receive lower gains from their work.
A 100% income tax would collect 0 revenue. He thought, understandably, that if someone has all of their income taken in tax they are unlikely to keep working. Similarly if the government sets a rate of income tax of 0% it will collect 0 revenue. In between these two points there must be a peak where the tax rates collect the most amount of revenue where there is a balance between effort being rewarded and tax being collected. This is drawn as the Laffer Curve (see below):
Most recently this was used by Boris Johnson to elicit sympathy for the super-rich. Boris asks that after hoovering up a disproportionate amount of our national income, we shouldn’t ask that the super-rich pay some of that back in tax. He says that maybe if we left them alone, we’d get more tax from the wealthy, because of the Laffer curve.
But this, and all arguments propped up by the Laffer Curve, misses a crucial point. The highest tax rates aren’t felt by the richest, they’re felt by the poorest.
Under the current benefit system there are a few people who have effective tax rates of over 100%, and they continue to work. Even after the introduction of Universal Credit people will still face effective tax rates of 83% (coincidentally world renowned economists have suggested an 83% top tax rate). Contrary to what the Laffer Curve predicts, people do continue to work when all of their additional income is taken from them.
The Laffer curve suggests we treat tax rates of the super-rich, who balk at the idea of a 50p tax rate, in the same way as we treat tax rates of those on low incomes. Those at the top of the income scale refuse to get out of bed for 50% of a fortune, whereas those on low pay work for 17% of next to nothing.
It seems more than a little odd that Boris suggests Knighthoods for those who are very well compensated and refuse to give a little back, but not for those who work three jobs for so little reward.
Tim Stacey, Policy and Campaigns Officer