Stumbling and Mumbling

Taxes & labour supply

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. 

Ten times earnings?

The papers report that the National Housing and Planning Advice Unit is predicting that house prices will reach 10 times average earnings.
This, though, is not a description of a future reality, but rather a threat. To see why, consider the obstacles to such high prices:
1. They'll become unaffordable. At current mortgage rates, the monthly repayment on a £250,000 mortgage would be equal to all the take-home pay of a £25,000 salary. Even a couple with an income of £50,000 will be spending half their post-tax income on the average mortgage.
2. There's no reason to suppose interest rates will fall as house prices rise. Quite the opposite, if home owners increase their spending in response to higher wealth.
3. High prices will naturally induce selling, as home-owners sell up to buy a place in the sun.
4. High prices will also reduce speculative demand for housing. In a rational world, this'll be because high prices should mean lower expected returns. In the real world, it's more likely to be because of the huge cost of buying. The Beenyitis that's stoked house price inflation recently should therefore subside.
5. There'll be a political backlash. Discontent amongst frustrated buyers is likely to lead to pressure to relax planning restrictions, with the result that more places will be built. This will bid prices down.
Indeed, this is precisely the purpose of the NHPAU forecast - to agitate for more building.