I’ve pulled evidence from IRS publications to show that rich people paid a lot more to Uncle Sam after Reagan reduced the top tax rate from 70 percent to 28 percent.
But the Gipper wasn’t the only one to unleash the Laffer Curve. The United Kingdom saw similar dramatic results when Margaret Thatcher lowered the top tax rate from 83 percent to 40 percent. Allister Heath explains.
During the 1970s, when the tax system specialised in inflicting pain, the top one per cent of earners contributed 11pc of income tax. By 1986-87, with the top rate down to 60pc, that had increased to 14pc. After the top rate fell to 40pc in 1988, the top 1pc’s share jumped, reaching 21.3pc by 1999-2000, 24.4pc in 2007-08 and 26.5pc in 2009-10. Lower taxes fuelled a hard-work culture and an entrepreneurial revolution. Combined with globalisation and the much greater rewards available for skilled workers, Britain’s most successful individuals earned a lot and paid a lot in tax.
In other words, Margaret Thatcher’s supply-side tax rate reductions paid big dividends, both for the economy and for the Treasury.
Unfortunately, just as American politicians have forgotten (or decided to ignore) the lessons of the Reagan era, British politicians also have gravitated to a class-warfare approach. Allister points out that this is having a negative impact.
Yet times are changing, and not just because of the recession. HMRC recently slashed its forecasts for revenues from the top 1pc. It now believes the number of people expected to report £500,000 or more in earnings will fall by a tenth this year; those on £2m are set to drop by a third.
Why have the numbers headed in the wrong direction? There are almost certainly lots of factors, but tax policy has moved in the wrong direction and presumably deserves part of the blame. The top income tax rate is now 45 percent. The value-added tax has jumped to 20 percent. Allister provides more details.
Capital gains tax is too high. Luxury homes transactions are falling because of higher stamp duty. Britain is now a high tax economy; this is distorting work and investment decisions, gradually shifting talent and capital overseas. The overwhelming majority of high earners are already contributing disproportionately to the exchequer; tightening the screws further will be disastrously counter-productive. The lesson of the past 30 years is clear: the best way to entice the rich to pay even more tax is to keep rates low and allow them to get even richer.
I have to admit that I don’t want anyone to pay more tax, but I’m even less happy about punitively high tax rates. So I’m reluctantly willing to let the clowns in government have more money in exchange for a tax system that is more conducive to economic growth.
Here’s my Laffer Curve video, which explains more about the relationship of tax rates, taxable income, and tax revenue.
The ultimate goal, of course, is to shrink the central government so that the legitimate functions of the state can be financed at very low tax rates. Heck, if the United States and the United Kingdom had the kind of limited governments that existed 100 years ago, neither nation would even need a flat tax. A few user fees and excise taxes would suffice. Now that’s hope and change.
P.S. I periodically share two great Reagan videos, which can be seen here and here, but I also have a couple of inspiring videos of Thatcher in action, which can be viewed here and here.
I got to see Arthur Laffer speak in 1981 and he told us exactly what was going to happen in the next few years and he is was right!!!
[…] Evidence from England Shows that If You Want to “Soak the Rich,” Keep Tax Rates Low […]
Another great article. Keep up the good work.
[…] Evidence from England Shows that If You Want to “Soak the Rich,” Keep Tax Rates Low […]
[…] Evidence from England Shows that If You Want to “Soak the Rich,” Keep Tax Rates Low […]
Your definition of “fairness” and my definition of “fairness” vary quite greatly. Fair means that all sides can agree that this a respectable level of “whatever” it is that is being argued/bought/sold. Without taxes, we wouldn’t have an infrastructure system, a military, or a judicial system for that matter. To say that taxes are a destruction of wealth is an extremely ignorant comment for someone who uses so many SAT words in a rant. Taxes are needed to support a progressive society so that future generations are ensured to have a platform to work through should they decide to be productive members of society.
Income taxation does not “allows recipients to avoid living self-responsibly”. There are plenty of responsible people who are suffering today because of the mistakes of others. People who did the right thing and lived within their means but because regulations allowed a group of people to make ridiculous bets… they are suffering and can’t get back up because there isn’t work. Flipping burgers won’t pay for a means to live and feed their kids. I would love to see how responsible you can be working 60 hours a week making $8 an hour with 2 kids and a roof to support them. Please come to NY & NJ and let me know how long you can hold up that charade for.
Income taxes should be used to support a society to ensure that it stays educated and trained so they can stay gainfully employed when things change. If there were programs educating people on the basics of starting a business, I would venture to say that more people would be entrepreneurs and probably succeed instead of fail within the first few years. There are plenty of people who are great at their craft and would be constructive members of society but don’t have the skills to manage or can’t get a loan to get started to even try.
No one is suggesting to hand out money to people for no reason. The bottom line is our expenses greatly outpace our income. The money needs to come from a lot of places, some of it being a better tax system, other parts from social programs that are abused, and the last of it from a military that is so large it can overtake continents.
Without government programs – Both contenders for the office of the President of the United States might not be where they stand.
You are right about one thing, excessive taxing ruins societal wealth along with personal wealth, they key word being “excessive”. I am not advocating to tax the wealthy 85%, I am merely stating the average of 15% they are paying isn’t enough support the current cost of the chess games they pay politicians to play with public money. That goes for Mitt Romney as much as that goes for Warren Buffet. Particularly when unemployment is so large there this isn’t any revenue coming in to support the checks that were written in the last 12 years.
The bottom line is the world has changed and the amenities we are all accustomed to COST MONEY. Public sewage, trash, traffic signals, bridges, highways, sidewalks, public electricity, among many others are all items that have become more prevalent throughout the country in the last 50 years. The money to support these systems needs to come from somewhere. The fact that there are thousands of illegals earning a wage and not paying taxes on those wages is a large problem in the revenue side that would help pay for these expenses…. however it’s not going to pay for it all.
“Dishonest and vicariously sanctimonious”…. pretty strong words considering most people of vast wealth are the ones who consider themselves to be above the rest of society. Like their money somehow makes them better than the rest of us. It is also extremely ignorant to assume that the people who believe in fair know nothing about productivity or responsibility.
You sound like a educated but yet pompous douche who serves the almighty dollar over the value of life and progress for future generations of the world. It is the greedy mentality that has brought us to this arena.
[…] One of the hot topics for the upcoming presidential election is one that makes us all cringe… taxes. I know folks who argue for both sides. Personally, I agree with this take on taxes and how they impact the government coffers. […]
Income taxation at any level destroys both individual and societal wealth, not so much because it reduces investment (“trickle down”) or because of poor decision-making by detached centralized beauracracies, although these do have prosperity-diminishing effects.
No, the fundamental reason that neither liberals or conservatives seem to have the guts to admit is that taxation is a coercive subsidy that absolves those on the receiving end of meeting bottom line profit / loss exigencies. Simply put, income taxation allows recipients to avoid living self-responsibly — Self-responsibility ultimately means that one derives an income by being worth more than what he consumes from society.
In a market environment, the only way to generate a profit and a legitimate income is to provide value in excess of the resources consumed in the process, whether by being directly productive, orchestrating a profitable activity, or investing in such.
People who don’t face bottom line pressures generally do not create wealth. One need look no further than the national debt, which is to government what the bottom line is to a business, the measure of wealth provided to society. Currently an insane $16 trillion dollars of societal wealth destroyed by government. Conversely, no business could similarly go for an extended period operating in the red, being a negative-sum liability on society in the process.
Profit is revenue minus cost, remember that? Revenue represents value provided to the market / society. Cost is resources consumed, therefore profit represents the wealth, the net benefit, delivered to society. It is so simple yet elusive in so many areas of debate. It doesn’t take intelligence to grasp, it takes envy-driven dishonesty to deny.
“Fairness” as it relates to taxation levels is nothing more than an arbitrary and emotionally-indulgent subjectivism exploited by people too dumb or dishonest to grasp the above. There is nothing “fair” about any aspect of a coercive process. A market-based person who makes a profit, whether as an employee or business owner, already provides to society in excess of his consumption, otherwise he could not be employed or in business. People who generate a market profit don’t need to “give back” to society; they’ve already done that. Conversely, those who live off the paychecks of productively self-responsible people generally exist as negative-sum liabilities who are, despite intentions, not fair regardless of how much they pay in taxes.
The coercive nature of government inverts the whole concept of “fairness.” It is so bizarre that people associate paying taxes as something good, something to be proud of, something “compassionate” or societally beneficient. Coercive subsidy, whether income taxation, corporate subsidies, or “stimulus” bailouts are all negative-sum value destroying processes for the same reason: the recipients are relieved of having to provide value in excess of consumption, they don’t have to make a profit, they don’t have to meet the basic responsibility of being an asset to society.
Communist nations don’t impoverish and implode themselves because of a lack of investment, but a lack of productive self-honesty across the populace. Wealth can be created in the absence of investment, but no amount of investment can create wealth where people don’t need to be productive in excess of their consumption.
Income taxation is not the redistribution of wealth, it is the destruction of it. Despite the validity of the Laffer Curve, what rational basis is there in tuning tax levels to increase government “revenue” in the first place? Taxation levels have nothing whatsoever to do with real world costs as otherwise determined through competing market forces, which makes the notion of extracting money from citizens based on their income all the more criminal. Government taxes income rather than consumption (e.g. sales or use taxes) as a means to loot the public far in excess of what it could otherwise obtain through volitional market mechanisms commensurate with the value of goods and services provided, in which case it would be a business. It also makes for a great political weapon pitting the dishonest and vicariously-sanctimonious “fairness” crowd against productive self-responsible people.
So we can agree that fairness is a problem. That’s my point, on all counts.
I won’t get into anything else. Maybe one day when you have a family member that walks in similar shoes that I walk in, you can see our side of the fence and meet me in the middle somewhere.
Well I don’t own a business but I do live in our tax system every day. I am currently paying an all-in marginal rate of around 45% (this includes medicare and the California state income tax). My effective rate is 40%. Next year, thanks to the return of the Clinton tax rates and the new medicare investment surtax, my marginal rate on an extra dollar of work income will be 54%. It only gets worse if California passes its own tax hike this year (raising our top tax rate an additional 3%). I can tell you that not only is that tax rate so discouraging that I am wondering about early retirement, but it is all the more grating to hear constantly that I’m not paying my fair share. I’m no plutocrat, either – I live in an expensive area where my high income affords me a very modest house and enough savings that if I’m lucky will provide me a retirement as good as a fire chief or police captain here. Railing about the example set by wealthy people seems pointless – I might as well rail about the culture that liberal celebs put on display constantly (you know, the vulgarity, the drugs and alcohol, the broken families). But I don’t, because (a) it won’t do any good, and (b) it’s none of my business anyway. So why should I care if the super-rich buy nice houses, fancy cars, boats, or art? They also fund many worthwhile charities (and some not-so-worthwhile). Again, their business unless they came by their wealth dishonestly.
Look at Gates, the late Steve Jobs, Mark Zuckerberg, or many many others in that Forbes list – how many of them were on the list 30 years ago, or 20, or even 10? This doesn’t paint a picture of a system where autocrats are consolidating power – it looks like people that have added greatly to our collective wealth have themselves benefited from it – in my mind, as well they should. What grates is to see people whose wealth comes from gaming the system, from exploiting government connections (because the government has the power of coercion), or outright crime. I may also think (to myself) that some ball players, movie stars, or corporate CEOs aren’t worth the outrageous pay packages they’re getting. But I express that by voting with my dollars – I don’t have to go to the game, see the movie, buy the product, or own the shares. I accept that, except where government coercion is at work, this is the market outcome, and whatever my feelings may be, it’s better than the alternative of some central planners deciding what a “fair wage” is for a pitcher/actor/manager. Hence some suspicion about union bosses (government-enforced monopolies), real estate tycoons (often times aided by cozy relationships with local government officials), and even ballplayers (taxpayer-funded stadiums, legal monopolies, etc.).
Doug, I think you’re a little lost in my thought process. I am not advocating to “tax” the upper middle class and “rich” at higher rates. I am simply stating that if the system were slighter fairer for everyone, things might be different all around. Republicans and Democrats are all alike, it’s the few people in their parties with common sense that actually make a difference worth noting.
I completely understand the logic that taxing a few thousand people 10% isn’t going to fix our debt or any of our problems for that matter. However I think everyone undervalues the social aspect of the display that extremely wealthy people put on. Some of them get away with tax evasion, some of them amass their wealth in a very grey area, and some of them work their ass off for it in a respectable manner. But us “little people” down here rarely hear about the people that work their ass off. We just hear about the Romney’s of the world that spend more money paying people to hide their money than they would be paying in taxes if the system was just simpler and maybe even fairer.
Us little people down here see things like that and it’s discouraging. We get up and go to work 10-14 hours a day and work our asses off and sometimes we don’t make much money. We barely make enough to scrape by, if you can even call it that. But we pay 35% of our salaries in taxes on top of all local and sales taxes daily. So here we are struggling and paying 35% but the people who are watching it come in faster than they can count can’t pay a FAIR rate of 25%-35%?
I am a small business owner, I know the burdens that the tax policy’s create because I live them every day. Do you?
Our problem is a fiscal one that trickles into a moral and social issues on many levels. I have a vast network of friends that own businesses, work for large companies, small companies, etc… But most of us have the same concerns regardless of where we are in life. We want a system that is interested in keeping it’s people gainfully employed, educated, and working towards a future. We’re not looking for hand outs, we’re looking for progress. The world has changed and we need to change with it.
Even if that future is a simple one living on a decent income that supports the house, a vacation or two, and maybe even a college education for our son/daughter.
As someone who lives in the “land of opportunity”…. I don’t think this is too much to ask.
RC, pointing to a few individuals is completely irrelevant. You could confiscate Buffett’s wealth and close the deficit for just 2 weeks. Work your way down the list picking them off one by one and you might make it a few months. What matters is how large numbers of people are treated and respond. The Democrats certainly understand this – they say “millionaires and billionaires” and point to a few ultra-wealthy people to draw your attention, then their tax policies drop the hammer on upper-middle-class people with good jobs, many of them living in high cost areas such as New York or the SF bay area. You may recall all the hand-wringing about poor Warren Buffett’s secretary – well, whose policies are doing more damage to her, the Democrats or the Republicans? It’s the Democrats that want to tax her income, which is largely from work, at 40% (plus whatever state income tax she owes). It’s the Democrats that are going to sock her again with higher tax rates on her investments, including a 3.8% surtax for Medicare starting next year. If most of her “wealth” is in the form of human capital, these taxes are taking a minimum of 10% of her overall capital. While they propose to hit Buffett with a 30% AMT 2.0 that will raise almost no revenue. So how will this affect him? Scarcely at all! Reason: most of his vast wealth is in Berkshire stock, where it is not subject to these personal taxes and can compound without taxes except at the corporate level. Buffett claims to have paid $7 million in taxes. If 100% of that was capital gains or dividends, he had $40 million in such income. So doubling his tax rate costs him an additional $7 million, which is an insignificant fraction of his $billions. Get a clue, take a look at how the tax rules work for these wealthy elite people. Then look at how much revenue you can realistically hope to get from them (not much because there just aren’t that many of them). And you begin to see what the real strategy is: squeeze the relatively large number of high-paid wage slaves (think doctors, engineers, small business owners, etc.) but make the system complex enough that they have trouble seeing just how screwed they are, because we still need them to keep working and not simply give up! As a bonus, it makes it harder for them, through work and saving, to join the elite – less competition for those gorgeous mansions/cars/wives!
And that is the Laffer Curve. The Rahn Curve, which in the longer term is the central determinant of future long term prosperity, bends downwards even sooner. I’ll stick by my theorem: As one draws the Laffer Curve for longer and longer time horizons, the Laffer Curve becomes equal to the Rahn Curve (i.e. max at government consuming about 15% of GDP).
Meanwhile, in the real world,… only dumb and naive people, like Americans, fail to see the short term benefits of redistribution — and thus, ironically, tend to prosper. Smarter and more sophisticated people, like Europeans, are quicker to spot the short term benefit of redistribution, understand how voting works, and find it irresistible to vote their cultures into decline.
Seems like Americans are getting smarter too, and seem to have finally figured out how voting works.
So there seems to be a “middle sag” back of the envelope theory for societal dynamics: Dumb citizens, like Americans tend to leave the productive alone, because they don’t know any better. Very intelligent citizens, like, say, the Swiss, who seem to understand the long term benefits of unadulterated effort-reward curves, tend to leave the competent alone to get rich and create multiple times their own wealth for their entire nations (yes, unevenly distributed, but the poor in those nations are better off than the privileged in nations imposing mandatory solidarity). Meanwhile, the middle intelligence nations, those who are not dumb enough to ignore the immediate benefits of redistribution but fail to see its mid-long term slow growth effects, vote themselves into decline. Don’t get me wrong, There are plenty of intelligent people in a dynamic country like America. I’m talking about averages, you know, along the lines of what Democrats refer to as “fly over country”. Indeed seems like fly over country is still primarily in the first dumb stage while the coasts seem to have transitioned to the enlightened European path to slow growth and self-destruction.
I’m afraid that Americans, especially a lot of Republicans, belong in the first (dumb) category and are about to make the transition into the middle-smart self-destructive category. Obama, whether through intelligence or serendipity, correctly sensed that the time was ripe for that transition to America’s self-destruction and Obama’s ascension to one of the most powerful people ever lived.
So… on.. to France! And beyond! … and let’s Hope France’s destiny to becoming Greece is delayed a bit, because that would throw a wrinkle into America’s Francification (hence Obama’s efforts to postpone any new European crisis till after November). Alas, the point of no-return has passed, regardless of what happens to France and when, America is on the path to Francification. America would be a different place if every American had spent a decade in France.
” The lesson of the past 30 years is clear: the best way to entice the rich to pay even more tax is to keep rates low and allow them to get even richer.”
So how does one explain the last 5 years where the worlds top wealthy individuals have seen their amassed wealth increase from no less than 20% to a staggering 100%+ in some cases. If your theory were true, we wouldn’t have half the problems we currently have. The dilution of currency is part of the reason why their real rates have increased, albeit numbers that are a joke, but increased nonetheless. But that has not kept up with the real dilution that currency worldwide has suffered.
You seem like a relatively grounded individual and this isn’t meant as an attack on your pretty thorough writing…. but there are some holes in the logic. They paid less in taxes but all the while we’ve always been in debt. Some that can be attributed to social programs and some that can be attributed to fighting wars to line peoples pockets along several other avenues.
Either way, a fair tax system is what the first problem is. Soaking the rich with a 10% effective tax rate isn’t an answer. You might want to look up “greed”…. the more you give them the more they want does not only apply to welfare recipients.
The system wasn’t made fair for the little guy so it shouldn’t be any fairer for the whale. It should suck equally on both ends. That’s what keeps people fighting for more. That fact that they know they can attain it with hard work. People all around the world have lost a lot of that hope because all the decks are stacked against them.