the corner office

a blog, by Colin Pretorius

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The Laffer Curve

My comment about university fees was just me banging on about the Laffer curve. Simple idea - if the government sets tax rates at 0% or 100% then it takes in no money. Somewhere in between is a sweet spot that maximises tax revenue. If tax rates are much higher than this, it may be politically satisfying but not good for the government's purse.

So what is the sweet spot? It's hard to tell, but in our current climate you kinda have a hunch. This column by American economist Greg Mankiw gives a good personal perspective on the Laffer curve in practice. Mankiw is an ex-Dubya economist and not deeply loved by all, but his arguments are nonetheless valid - after a certain point, plenty of well-to-do people who could add more value to the economy just don't bother.

Also, this column from Monday's Evening Standard points out some of the effects of recent tax changes in the UK alone (including £500 million in lost tax revenue, from just two hedge funds which have packed up and shoved off to Switzerland).

As I've written before, a very substantial proportion of income tax is paid by the very wealthy. The UK has an especially vicious anti-wealth culture, and squeezing the rich is a popular rallying point, but without rich people paying the taxes they do, everyone else would be in big trouble.

{2010.10.13 - 16:37}

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