It’s called the Laffer Curve, non policy wonks/economists can read here as background. Yet again Professor Laffer has been proven right. There is an optimal level of taxation. Raise taxes too much and you get less of that activity, lower them too much and you wont collect enough money. This is the basis of Reaganomics and Supply Side policy. It works every time it is tried becasue when an activity is taxed, that activity is reduced because people will avoid it to avoid the tax if the tax is too high. What is too high? Well, that is up to the econometricians to work out and is well beyond the scope of this Special Report. Raising taxes results in less of the activity being done that is now taxed. It warps the economy and makes people move their money away from paying the tax.
From Wiki, it is accurate: In economics, the Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. It is used to illustrate the concept of taxable income elasticity – that taxable income will change in response to changes in the rate of taxation. The Laffer curve postulates that no tax revenue will be raised at the extreme tax rates of 0% and 100%. If both a 0% and 100% rate of taxation generate no revenue, but some intermediate tax rate generates some tax revenue, it follows from the extreme value theorem that there must exist at least one rate where tax revenue would be a non-zero maximum. The Laffer curve is typically represented as a graph which starts at 0% tax with zero revenue, rises to a maximum rate of revenue at an intermediate rate of taxation, and then falls again to zero revenue at a 100% tax rate.[citation needed]
One potential result of the Laffer curve is that increasing tax rates beyond a certain point will be counterproductive for raising further tax revenue. A hypothetical Laffer curve for any given economy can only be estimated and such estimates are controversial. The New Palgrave Dictionary of Economics reports that estimates of revenue-maximizing tax rates have varied widely, with a mid-range of around 70%.[3]
The Laffer curve is associated with supply-side economics, where its use in debates over rates of taxation has also been controversial. The Laffer curve was coined by journalist Jude Wanniski in the 1970s, with Wanniski naming the curve after an idea sketched on a napkin in a restaurant by Arthur Laffer. Laffer later pointed out that the concept was not original, noting similar ideas in the writings of both 14th century Muslim philosopherIbn Khaldun (who discussed the idea in his 1377 Muqaddimah) and John Maynard Keynes.[1] Numerous other historical precedents also exist.
Ok, now that I have bored you to tears with Economic jargon while getting my daily dose of Wonkism, let’s proceed. In England, the Crown raised the tax to 50% on the wealthy. Well, guess what happened? The government assumed they would collect billions more in tax, Nope…the tax revenue has fallen. The treasury insisted that this tax would bring in £2.5billion additional pounds, it actually has caused the treasury to take in £500million less than last year:
The controversial 50p (%) tax band is ‘not working’ and revenues have fallen since it was introduced, new figures suggest.
They appear to show the wealthy are finding ways to dodge the tax band levied on incomes of more than £150,000.
In January, the tax take from those who do self-assessment tax returns collapsed by more than £500million, compared with the same month in 2011. They fell from £10.86billion to £10.35billion.
The figures have been eagerly awaited by George Osborne as they provide the first evidence of the usefulness of the tax rate.
This is because January 31 was the deadline for all self-assessment forms to be filed for 2010-2011, the first full tax year since it was introduced.
The Centre for Economics and Business Reseach said it provided evidence that the 50p tax rate may be starting to hit receipts.
The figures will add to pressure on the Coalition to drop the levy amid fears it is forcing entrepreneurs to relocate abroad.
Separate figures, also published yesterday, provided more evidence that wealthy people are taking steps to avoid paying the tax.
In April 2010, it warned the next tax rate would raise ‘little or no tax’ despite the Treasury’s insisted it would be worth up to £2.5billion a year.
As the latest figures show, it warned there would be many ‘obvious tax planning opportunities’ with accountants also devising loopholes to avoid it.
Yesterday a Treasury source said the Chancellor has always made clear the 50p tax rate is ‘temporary’. HMRC is currently doing an assessment of how much revenue it actually raises.
Dr. Arthur Laffer, Economist and professor at University of Southern California, with “Laffer Curve” on blackboard, Feb. 23, 1981.
