One of my photos

Laffer spotting

August 4th, 2014 · Posted by Skuds in Politics · No Comments · Politics

I had a real surprise the other day. I was watching Sky News and they had an interview with Arthur Laffer, the bloke who has that curve named after him.

For some reason I had always just assumed that the Laffer curve, and by implication Laffer himsef, were a lot less recent than that. I just imagined him being perhaps a contemporary of Friedman and therefore probably either dead or extremely ancient. It turns out he is only 73 but looked a lot younger than that. It turns out that the eponymous curve only came to fame in 1974!

Now I am familiar enough with the idea of the Laffer curve to cringe every time it is trotted out, usually by people using it to argue for lower tax rates. I am no economist, but it seems to me that for the theory to work 100% you would need a much simpler tax system, without bands, thresholds, tax reliefs and all the rest, so at best it can be only a vague theory.

As far as I understand it, the main point is that there is a point which is the peak for revenue collection and that raising the rate above that will result in lower revenue. Almost everybody who quotes it seems to make the unfounded assumption that we are at or above that optimum tax rate already and so the Laffer curve dictates that tax rates should be lowered. They also ignore the fact that it is a peak and that reducing too far leads to revenue reductions as much as increasing too far.

As far as income taxes are concerned, there are so many variables that it just doesn’t seem appropriate or even useful to try and use the Laffer curve, especially when no two economists would ever agree on what rate constitutes the optimum.

The interesting thing for me was that Laffer mentioned other taxes, which would seem to be much more suitable for such analysis, specifically tobacco duty. These do not have bands and thresholds so are much more straighforward, and effects can be more easily measured. As taxation has increased ever more, you probably see revenue coming down as people either reduce consumption, resort to smuggled, stolen or counterfeit fags or just give up.

Of course the Laffer curve becomes irrelevant here because the intention of the taxation is supposedly not to maximise revenue but to discourage smoking, but it made a change to see it used in a case where it actually applied and seems to work.

Mind you, although the aim of these so-called ‘sin taxes’ is to try and manipulate our behaviours and not just collect revenue, they do collect revenue. It got me wondering about what would happen if they eventually worked and the social targets were reached. Wouldn’t there be a great big hole in the books?

People say that smoking-related diseases cost the NHS a lot to treat, and I’m sure they do, but if nobody smoked we would just have more people living longer, drawing pensions for longer and needing lots of long-term care for years and years instead of medical care for months. We could end up with bigger bills, albeit later on, but without all the tobacco duty to pay for it.

My mind was leading this way because I just kicked the habit myself. I am just starting my fourth completely fag-free week and I’m already quite pleased about how much less I am forking out. But over 90% of that was going to the Treasury in duty and VAT.

I know that giving up is a good thing, but am I helping to shaft the economy now?

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