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February 22, 2010

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botogol

high earners are likely have another option that NY cabbies don't : move to a different country.

eg: I know that many banks are working on how to relocate high earners out of the UK

When a high earner relocates we lose 100% of his/her tax yield.

I would suggest that even if the change in behaviour of the stay-behinds is to work harder, any increased yield will be overcome (in the long run) by loss of tax yield from the emigrants.

AS

"any increased yield will be overcome (in the long run) by loss of tax yield from the emigrants."

Lots of people have skills they could take abroad - are you saying we shouldn't tax anyone who can relocate? It's blackmail, pre and simple

chris c

"high earners are likely have another option that NY cabbies don't : move to a different country.

eg: I know that many banks are working on how to relocate high earners out of the UK"

If you earn that much, then chances are you have a non-domiciled tax status anyway, or are resident on the IoM or the Channel Islands.

Income tax has no effect on what large companies do with their employees, as the cost of that tax is borne by the individual, not the employee. It's the individual who will choose to take his skills to another country, not the company. And really, I'm not sure many people even entertain it as an option. Besides, there are many jobs that would fall foul of the 50p tax rate, and almost all of them require that you remain in the UK for a significant proportion of your time.

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I think the flux in taxes can affect everyone including the simple NY Cabbies. Both high earner employees and Cab drivers share the same fate when the economy shakes down.

Straus

I think governments need to be quite wary when raising tax rates to what might be a symbolically significant level of 50 per cent. I know this is just “yakity-yak”, but my impression is that many wealthy people have a strong psychological objection to paying tax at a rate where they are having to give away as much of their marginal income over the threshold as they are earning. A rate of 49 per cent might be more prudent.

Another newish factor that needs to be taken account of is just how mobile people are now. Many of them already have second homes in France or Switzerland, so re-locating is really not much of a wrench. What is more, modern communications make it very easy for many of them to perform their highly paid functions in any location.

On the other hand, I imagine there are other factors that might induce people to flee these shores, such as crumbling infrastructure and rising social tensions, which could result from cutting expenditure rather than raising taxes.

Mark Wadsworth

"they found a negative elasticity, of around minus 0.2. That means a 10% rise in cabbies’ revenue per mile caused them to work 2% less."

How do they know that this is not the quantity demanded dropping by 2% in response to a 10% fare hike?

Unless they can prove that it was income-substitution rather than a fall in quantity demanded, the whole theory falls flat on its arse.

chris c

"I think governments need to be quite wary when raising tax rates to what might be a symbolically significant level of 50 per cent. I know this is just “yakity-yak”, but my impression is that many wealthy people have a strong psychological objection to paying tax at a rate where they are having to give away as much of their marginal income over the threshold as they are earning. A rate of 49 per cent might be more prudent."

Yeah, and I think that as soon as you factor in other deductions, you might have a lot of really annoyed executives. I'm not sure if there's an economic justification for the 50% rate, or it's an ideological target, like 50% of young people in HE, but I'd rather see a top rate figure that's linked to actual research into the tax base rather than something that's been made up because we have to do something. If it was 50% because they're going to reinstate the 10p tax rate and the 50% rate would compensate for the loss, then that'd be fine - but I think if that were the case, it'd need to be higher than 50%.

I'd go for 45%, largely because I think that's good enough for a symbolic move, that other deductions wouldn't stretch it to over 50% of gross earnings and finally because it'd affect so few people in the first place, the effect of that 5% reduction would be negligible compared to the good will you might have if you increased someone's rate by 7% out of necessity rather than 12% out of spite.

Tim Worstall

One minor thought.

Cabbies are very much on piece work. Do another trip, get more money.

Not sure it really works quite like that for investment bankers....

RobG

"high earners are likely have another option that NY cabbies don't : move to a different country."

This could work another way. The fact that it doesn't matter where you employ bankers means their work could be offshored to India, which should put downward pressure on their wages. You can't do this with cabbies, at least when there are immigration controls.

chris

@ Mark; the paper says demand didn't fall in response to the fare increases. Had it done so, cabs would have suffered a fall in revenue per mile, as cabbie drove around empty looking for customers. But this didn't happen.
@ Tim - this is exactly why cabbies make just a great subject for study. They can vary their working hours as they choose, so we can clearly see how effort responds to income.

botogol

it would be interesting to have one tax rate for journeys starting to the West of Park Avenue and another for those to the East.

While cabs would certainly continue to ply their trade in both halves of Manhattan Economists would certainly expect an incentive like this to have an effect at the margin, with cabbies and therefore their fares in the centre of the island perfering to work the low tax side.

I'd expect the relocation effect to be bigger than then the income effects

Tim Worstall

"@ Tim - this is exactly why cabbies make just a great subject for study. They can vary their working hours as they choose, so we can clearly see how effort responds to income. "

Sure, I know there's lots of such studies. Many of which show that people do indeed have an earnings target for the day. Once that's earned they bugger off home.

Which explains why there's never a cab around when it's raining. Rain increases demand, increases earnings, leading to fewer cabs on the street (weird but true).

However, I'm still not sure that looking at the income and substitution effects with one self-selecting group necessarily tells us all that much about them in another.

Certainly I would be very wary of now adopting Ritchie's idea that raising the tax rates on hte rich will lead more wives in rich families going out to towrk (yesw, he really did argue that would be the result of a rise in marginal tax rates to 75% at the top).

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Yeah, and I think that as soon as you factor in other deductions, you might have a lot of really annoyed executives. I'm not sure if there's an economic justification for the 50% rate, or it's an ideological target, like 50% of young people in HE, but I'd rather see a top rate figure that's linked to actual research into the tax base rather than something that's been made up because we have to do something. If it was 50% because they're going to reinstate the 10p tax rate and the 50% rate would compensate for the loss, then that'd be fine - but I think if that were the case, it'd need to be higher than 50%.

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