Now I know I like to cite Dan Mitchell from the CATO institute a bit too much. But he has correctly pointed out that the UK is a good model for showing how the laffer curve works.
A funny thing often happens on the way to soaking the rich: They don’t stick around for the bath. Take Britain, where Her Majesty’s Revenue and Customs service reports that the number of taxpayers declaring £1 million a year in income fell by more than 60% in fiscal 2010-2011 from the year before. That was the year that millionaires became liable for the 50% income-tax rate that Gordon Brown’s government introduced in its final days in 2010, up from the previous 40% rate. So, the total number of millionaire tax filers plunged to 6,000 in 2010-2011, from 16,000 in 2009-2010. The new tax was meant to raise about £2.5 billion more revenue. So much for that. In 2009-2010 British millionaires contributed about £13.4 billion to the public coffers, or just under 9% of the total tax liability of all taxpayers that year. At the 50% rate, the shrunken pool yielded £6.5 billion, or about 4.4%.
He also points out the three main points which explain why the laffer curve works:
- When tax rates increase, sometimes people engage in tax avoidance, lowering their tax liabilities legally.
- When tax rates change, sometimes people choose to alter their levels of work, saving, and investment.
- And when tax rates go up, sometimes people resort to illegal steps to protect themselves from the tax authority.
Finally, I love how he refers to the current government as the squishy Tory-Liberal coalition. I now like to call the tory party the faux-conservatives. They could go much further with their tax cuts and reducing the burden of government but they seem to have lost their backbone.
The laffer curve. The libertarians most powerful tool. It explains how increasing tax rates by too much can lead to reduced revenue and that decreasing tax rates can promote growth and prosperity.
Ronald Reagan proved this can work:
The table above, which is based on data from the IRS’s Statistics of Income, shows what happened to tax collections from upper-income taxpayers between 1980 and 1988. Supply siders can be criticized for many things, especially their apparent disregard for the importance of limiting the size of government, but the IRS figures clearly show that lower tax rates were followed by more rich people, more taxable income, and more tax revenue. For those keeping score at home, that’s a perfect batting average for supply-side economics. – Dan Mitchell
The majority of tax rate hikes arrive via class-warfare policies, which aim to ‘tax the rich and give to the poor’. However, as I explained here, the geese that lay the golden eggs can fly accross the border.