The IFS’s claim that it is unclear whether the 50p tax rate will raise any revenue at all (pdf) has led to some iffy headlines - compare the Torygraph’s story with Paul Johnson’s actual words - and another Richard-Tim spat.
I fear, though, that this is distracting us from a complication - that there is not one but three Laffer curves here. What I mean is that there are three questions we might ask of the top tax rate:
- does it maximize revenue?
- does it maximize GDP?
- does it maximize well-being?
There is no reason, a priori, to suppose that the answers to these three will coincide.
For example, a tax rise might reduce revenue even if it doesn’t affect GDP if it has no effect upon labour supply but encourages people to seek legal or illegal tax dodges.
Or it might reduce GDP whilst improving well-being. This would happen if the tax rise deters the sort of activity that is negative-sum for the economy as a whole. I’m thinking here of rat-races in which everyone works long hours in the hope of getting promotion; patent trolling; office politics; or spending on positional goods that have negative externalities (pdf).
Which brings me to a hypothesis. It could be that the tax rate that maximizes revenue is quite low - because even a modest tax will lead to tax-dodging - but the rate that maximizes GDP is higher, and that which maximizes well-being is higher still.
To focus only upon the first of these, the revenue effect, is to make a fetish of the public finances whilst ignoring the real economy.