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July 04, 2011



Apologies if I miss the point here, and you are only instinctively in support of income tax relative to tariffs. However, I don't know why liberal leftiness would predispose to thinking taxing the fruits of labour is a good idea. Surely taxing wealth (particularly land) is much better, for well-rehearsed reasons. It may be mere anecdote, but I don't know anyone in the 40% or 50% bands who doesn't undertake less work than they would were it untaxed.

You haven't mentioned the obvious substitution available to high income earners and capitalists in general: capital appreciation for income.

Thirdly, I suspect you are mistaken about there being no analogy with firms shutting down faced with a tariff on inputs. Since firms must attract labour with NET wage, income taxes are a cost on input (labour) for the firm. Faced with this tax, a firm may well either collapse or decide against creating a paid position.

Income tax, trade tariffs and corporation tax strikes me as an atrocious way organise a tax base. Taxes based on assets would encourage their productive use, seek fairer payment for value-adding public infrastructure projects and provide better incentive for labour.

Your instinct is to tax the poor man who works his arse off and does well for a year and not the noble who inherited Buckinghamshire!


I think its more a case of what is unseen.

Its unlikely that people would reduce their income in response to an increase in income tax (though there could be cases where due to a threshold triggering a higher overall rate say, then the logical response would be to reduce ones income below the threshold).

But its entirely conceivable that in response to higher tax rates people refuse to earn more. Take less overtime, refuse extra work if self employed. I know this is the case for me. I'm self employed and am pushing the 50% rate bracket. I'm not going to bust a gut on a new project only for the tax man to grab over half of the profits. So I don't bother.

But that 'income foregone' doesn't show up in any statistics.


Small businesses often operate just under the VAT threshold because if they go over it they have to be VAT registered and charge VAT. This would result in either higher prices to the customer (and thus most likely less work and profits) or the same price to the customer and an immediate reduction in net income for the business.

That is effectively a tax on income in my view, a somewhat opaque and skewed one, but an income tax in practical effect.

So if that is accepted as the case, why should higher actual income tax rates not depress incomes to lower than they might otherwise be?


@ Andrew - I agree, there is a good case for higher land taxes.
@ Jim - I take your point. The question is one of magnitude: how significnt is it? I can believe that some self-employed do make this choice. But these are only a small fraction of the workforce. Is it really the case that many employees in the 50% bracket cease to be ambitious for promotion because of the tax rate?

Mark Wadsworth

Well, as Andrew says, least bad tax is tax on land (taxing wealth in a general sense is pointless and probably counter-productive), but failing that, the worst taxes are tarrifs (which includes of course VAT, which is a heavily disguised tax on the income of the producer and his employees). A flat income tax (or corporation tax) does have Laffer negative effects, but these aren't as bad as the impact of VAT.


You are neglecting the intensive margin here. The dispersion in incomes is very large, and a clear tradeoff exists between income and leisure, or quality of work. Thus, high income taxes will decrease pre-tax income. The effects will be especially large in the long run, as human capital formation can take years or decades.

The land tax has been mentioned already, but failing that, a tax on consumption is better than an income tax from a pure non-distortion POV, because it taxes present and future incomes at the same rate. However, an income tax may work better in practice, by discouraging envious accumulation of savings.

Similarly, the public finance/optimal redistribution literature suggests that marginal tax rates should be an S-shaped function of income/consumption, tapering off at very high levels. However, if high incomes are envious or result from rent-capturing behaviour, taxing them highly makes sense.


The point is that tariffs also reduces incentives to work. Tariffs reduces the purchasing power of one hour of work as effectively as a broadbase work tax (unless the imports are inelastic and that foreign producers are even more inelastic).

The issue was discussed by Tyler Cowen in the context of carbon tax. It shows that if the carbon tax can be a solution to climate change, it is no solution to fiscal problem. The same argument probably applies to tariffs imports (which do nothing for the environment).


jean, you're right about the "tax-interaction effect" of carbon taxes and import tarriffs. However, taxes are still fiscally efficient when compared to alternatives such as carbon mandates and import quotas: the latter measures have the same impact on prices and purchasing power (assuming that they're binding) but yield no government revenue.

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