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A Laffer minute

March 22nd, 2012 · Posted by Skuds in Politics · No Comments · Politics

I’m no economist. I have same ability to predict the future as economists (i.e. none) but I am disqualified as an economist because I know that I can’t predict the future. Also I don’t trust the Laffer curve. It seems to me to be a bit like the Bible – quoted by both sides of an argument to support some firmly-held belief.

I don’t trust it because, although the theory might be OK that there is a point beyond which raising tax rates reduces revenue, nobody can agree where that point is.

It is all very topical, what with the budget and the debate about the top rate of income tax and everything. One of the reasons why people who don’t like higher tax rates don’t like higher tax rates is that they reckon that having a higher rate of tax encourages people to avoid or evade those taxes by giving them more incentive. I’m sure that is right, though less sure why governments, and especially the current one, only apply that logic at the top end.

There is a famous aphorism about how the rich can only be encouraged to work harder by paying them more and the poor can only be encouraged by paying them less, which we all enjoy and maybe there is a bit of that. The same logic used to lower the top rate of tax could be used to increase benefits: if benefits are so low you can’t live on them, and can’t find work then there is a huge incentive to fiddle them.

Or how about this one? A story in our local paper says that Crawley is the No 3 place for illegal tobacco, with nearly a third of the cigarettes in town being smuggled or counterfeit. With 37p being added to a packet, that figure isn’t likely to decrease. Of course tobacco duty is seen to have a public health purpose by discouraging smoking, but at what point does it just discourage legal smoking? Maybe somebody should plot a Laffer curve for it?

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