Earlier this week, I had a lively economic debate over dinner with two young Right-wing friends.<\/p>\n
They are both broadly supportive of the Laffer curve<\/a> which suggests that, above a certain percentage rate, tax on income produces a lower yield and they believe that in many Western economies we are already beyond that rate so consequently government should reduce tax rates and this would increase tax revenues.<\/p>\n At the theoretical level, I am always suspicious of neat relationships in the real world suggested by academic economists. I remember the Phillips curve<\/a> for instance. Furthermore proponents of the Laffer curve differ wildly on the tax rate beyond which the tax yield falls with estimates varying from around 35% to 70%.<\/p>\n I am highly sceptical of the utility of the Laffer curve. It presupposes that very high earners are incentivised by higher take-home pay and that they would not work for salaries where most of the marginal increase in income is taken by tax. I suspect that, beyond a certain of level income, increases in take-home pay are not that important and that such high earners like excessive gross salaries – regardless of the marginal rate of tax – because it is a symbol of their status and power.<\/p>\n Clearly, however, high marginal rates of tax are likely to stimulate tax evasion and I just wish that we would put as much effort into combating tax evasion – by individuals and corporations – as we should do in combating benefit fraud.<\/p>\n