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Have you heard the one about cutting income tax for the rich bringing in more revenue for a government?

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Have you heard the one about cutting income tax for the rich bringing in more revenue for a government?

Post by Ivan on Fri Apr 17, 2015 5:23 pm

Tories and Republicans like to cut taxes for the rich for two reasons. Firstly, it rewards their core supporters; secondly, it’s part of their philosophy that people should be able to keep as much of their income as possible for themselves. The justification often used for cutting taxes for the rich is that doing so actually results in an increase in government revenue. That theory is based on ‘the Laffer Curve’.

Arthur Laffer is an American economist, but he doesn’t claim to have invented the concept. Word has it that it was concocted on the back of a napkin by Dick Cheney and Donald Rumsfeld at a meeting in 1974. They drew a curve starting with a 0% tax rate (which obviously brings in no income for a government) to a 100% tax rate (which also brings in no income, since there wouldn’t be any point in working!). Somewhere between these two extremes is the optimum rate of taxation for maximising revenue without removing the incentive to work.

When Ronald Reagan became US President in 1980, his government spent more on defence and reduced taxes, a policy which came to be known as ‘Reaganomics’. It was argued that slashing taxes would increase revenues, and in 1981 the top rate of tax was reduced from 70% to 50%. That reduced government revenue by around 3% of US GDP over the next four years. By 1988, Reagan had reduced the top rate to 28%. He began his presidency with national debt at 32.5% of GDP in 1981 and ended with it at 53.1% of GDP in 1989. Cutting income tax for the rich didn’t increase government revenue. Besides, even if there had been an increase in the tax take, it wouldn’t have been proof that it was the result of a lower rate; it could just have meant that the rich were ‘earning’ a lot more than previously.

Over the years 'the Laffer Curve' argument changed. Originally it was that higher marginal tax rates on those making the most money discouraged them from investing, starting new businesses, and working hard. The result was supposed to be less income growth and hence lower tax revenues. When that was discredited, Laffer himself began to argue that the problem with high marginal tax rates is that they encourage high earners to hide and shelter their income.

In the UK, Tories such as David Cameron, George Osborne and John Redwood talk as if it’s a proven fact that lower taxes for the rich bring in more revenue, no doubt because it suits their ideological agenda. They latched on to this argument to justify cutting the top rate of income tax from 50% to 45% in 2013, at a time when many in the country were seeing a severe drop in their living standards. Yet the 50% rate, in force from 2010 to 2013, had increased the tax take; as Chris Leslie, who is currently shadow chief secretary to the Treasury, has noted: “We now know that tax revenues from people earning over £150,000 were nearly £10 billion higher over the three years that the 50% rate was in force than was expected at the time".

Mark Thoma, an economist at the University of Oregon, has written: “The notion that lowering the top marginal tax rate dramatically reduces tax avoidance appears to be wishful thinking”. Surprise, surprise, so it’s just another of those myths that right-wing politicians use to hoodwink voters and to justify their odious policies. The fact is that as long as it costs less to avoid taxes than to actually pay them, plenty of rich people will do just that, no matter how high or low the top rate of income tax.

Sources:-

http://en.wikipedia.org/wiki/Laffer_curve

http://economistsview.typepad.com/economistsview/2008/01/the-new-laffer.html

Further reference:-

http://www.theguardian.com/commentisfree/2012/jun/27/laffer-curve-tax-cuts-rich-funny
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Re: Have you heard the one about cutting income tax for the rich bringing in more revenue for a government?

Post by oftenwrong on Fri Apr 17, 2015 11:13 pm

Similarly, although government figures show increasing numbers of workers in employment over the past three years for which records are available, HM Treasury collections of income-tax during the same period although they have risen have not been rising at the same pace.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/414228/20150315_Febmonthlyreceipts.pdf



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