What effect do taxes have upon labour supply and tax revenues? Everyone's got a prejudice here. But if instead you want some facts, you could try this big new paper which surveys the evidence, and the difficulties involved in getting those estimates. Some highlights:
1. "Male hours of work are almost completely irresponsive to changes in work incentives." For reasonable changes in tax rates, we work full-time whatever.
2. But "for high skill men higher rates of taxation are likely to discourage effort and creativity quite substantially." We might go into the office as much as ever if taxes go up, but we spend less time working and more time arguing about our favourite member of Girls Aloud. However, most estimates here suggest elasticities of tax revenue to rates (around reasonable levels) are less than one, so higher tax rates do just about bring in more revenue.
3. The self-employed are more responsive to taxes. It's here - if anywhere - that we might find big adverse Laffer curve effects upon taxable income and hence revenues.
4. Women's hours are more responsive to taxes than men's, but not much. On average, a woman working 25 hours a week needs a 20% rise in post-tax income to work one extra hour.
5. Participation in the labour market, rather than hours worked, is sensitive to incentives, especially for low-skilled men. This suggests the benefit system and tax credits can have big effects upon whether men work or not. And this, combined with points 1 and 4, suggests there's something to be said for big in-work benefits at the expense of high marginal withdrawal rates.
One big caveat here, however, is that the very long-term effect of higher marginal taxes might be larger than the shorter-run effects. Higher taxes might reduce incentives to get education and training (as they reduce the pay-offs to having high skills) or might even change social norms to create a "why work?" culture.
These effects, however, are almost impossible to quantify.
"elasticities of tax revenue to rates (around reasonable levels)": but what's reasonable? For quite a while the Labour Party thought that 98% tax was reasonable: one year, they managed to make it above 100%, retrospectively, for some holders of Gilts.
Posted by: dearieme | March 23, 2008 at 01:49 PM
More importantly, what's a Sarah Harding and why should we care?
Posted by: Ken Houghton | March 24, 2008 at 10:27 PM
Gratuitous Sarah indeed!
Posted by: a very public sociologist | March 25, 2008 at 12:37 AM
Does not compute! If you have 'big in work benefits' and 'high marginal withdrawal rates', then assuming you have the highest withdrawal rate of all, 100% (which is not uncommon in UK welfare/tax system), then working backwards, you'd have equally large out-of-work benefits, or at least large 'working-just-enough-to-qualify' benefits. Which defeats the object.
What you are proposing appears to be an extreme version of the tax credits system, which has been a total and utter disaster.
Moreover, being honest about this, if you are looking at a wage of £6 an hour, a 50% tax rate knock this back to £3 an hour so it's hardly worth bothering. If you are a superstar on £1,000 and hour with a 50% tax rate, it is still worth doing.
Personally, I'd favour low flat income tax (and more land value tax), that's a different topic.
Posted by: Mark Wadsworth | March 25, 2008 at 11:53 AM
Funny you say that. Since the budget I've switched from Nadine Coyle to Kimberley Walsh.
Posted by: Ewan Watt | March 30, 2008 at 01:01 PM