December 12th, 2013

GALLERY GUIDO: Osborne, the Laffer Curve and the Left

There’s a Computable General Equilibrium Model at the Treasury. If it were made of string and resin it wouldn’t be any less reliable, but its predictions about the cut in corporation tax are likable, so let’s quote them.

The Treasury select committee told us the computer is forecasting corporation tax going from 28 pence to 20 pence will increase GDP between 0.6 and 0.8 per cent, and will increase business investment from 2.5 per cent of some damn thing or other to 4.5 per cent.

It’s “a quiet revolution” George Osborne says, of this example of the Laffer Curve in action.

This curve is still mocked by the left. But it has an interesting pedigree.

An early exposition from the 1930s put it like this:

“Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget.”

That is – the budget can be balanced by reducing tax not increasing it.

“For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more—and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.”

“The act of a gambler” to reduce taxation. “A dangerous experiment” as it might be said. An ideological leap into the dark. These criticisms are still made by the left, and even by Red and Redder Eds.

The author of the proposition was one of the few economists capable of writing a phrase like “the rectitude of plain arithmetic”. But then he wasn’t an economist from birth.

It was John Maynard Keynes.


73 Comments

  1. 1
    ticker says:

    G Brown is tick

    • 12
      The new Messiah says:

      The real question is where on the Laffer curve is the sweet spot. Too far one way and you lose revenue from too high taxes. Too far the other way and you lose revenue from too low taxes. This is why it is curve and not a straight line. So where is the sweet spot? Maybe we should ask the Danish Prime Minister for another selfie.

      • 19
        Anonymous says:

        There’s no such thing as “too low taxes”.

        • 30
          john in cheshire says:

          Hear, hear.

          • The new Messiah says:

            Using the example above, where manufacturers ask a higher price when their goods are not selling, this is just as stupid as selling the goods at far too low a price so you never make any money. Clearly there is obviously a point at which if your taxes are too low they do not bring in enough revenue to pay for things like law and order, defence, health, pensions, education, etc that we all take for granted.

          • Sad but True says:

            Yes, but the point is that you could do away with taxation for most of these things and pay for them yourself as you wished, rather than having government force you to pay for them. So it’s not really a fair comparison anyway.

          • Anonymous says:

            taxation is a subject that is coming up more often at work.

            more early retirement and less working some going to three day weeks and such like are becoming discussed openly and becoming more common.

            these workers? oh, they are white, older, male, tax fodder.

          • Quiet Bat Person says:

            There is a fundamental problem with taxation. It is not used simply to raise revenues, but also, ostensibly, to modify behaviour.

            So, too reduce road traffic, and C02 production, for example, they put up fuel prices, road tax, etc.. But the more effective the deterrent, the less the tax it then raises.

            Also, there then arises the ridiculous situation where people, modifying their behaviour in response to punitive taxes, are then accused of tax avoidance, or worse, evasion.

          • Historyman says:

            How would you pay for defence yourself? A privatised soldier outside your door? Same for Police, Fireman, Ambulance driver, road sweeper, streetlamps?

        • 32
          lola says:

          Hear. Hear 2

        • 33
          Anonymous says:

          Yeah, and only in Britain could you hear someone say “some people earn too much money” – a rabid lefty actually once said that to me.

          Only in Britain could the concept of ‘salary sacrifice’ exist. What a fuckin’ state Britain has become/ is becoming. We’re being treated like twats.

        • 51
          Eeyore says:

          C’mon, that’s simply daft. You want not to to pay for the armed forces, police, courts, roads, border guards…..etc etc?

          Any sane person wants tax to be as low as possible, of course, but you don’t have to be a Guardian-reading loony to want essential services to be maintained.

          As to what constitutes ‘essential’ is up for debate, as is the matter of who operates them (mostly, my vote is against the civil service), but someone has to pay by some mechanism, and taxation is the least worst one we have.

        • 53
          Anonymous says:

          Taxation is theft.

      • 70
        David Bouvier says:

        Problem is you are thinking about maximising the government tax take, by taxing to the point where the incremental tax collected is matched by the damage to the rest of the economy. This is taxing well beyond the point where significant economic damage is being done

        At the “sweet spot” let us imagine a marginal tax rate of 40p in the pound, so when £1 tax raised is met by £1 loss of taxes from economic activity, you are destroying £2.50 of economic activity to raise £1 in taxes. Well done.

        In case you hadn’t noticed the point of government is not actually to maximise the tax take at the expense of the public (though it certainly sometimes seems like that)

    • 14
      Bernard Madoff says:

      Brown only lasted 13 years or is really from 2001 but started to be caught out from 2005, fleecing anyone from the UK.
      I lasted 35 years fleecing the rich.

      • 16
        The new Messiah says:

        Even an economic dummy like Brown must have known about the Laffer curve. That is why he only raised the higher rate by 10% when he knew he and his party were likely going to lose the election. And as a result we had three years of low growth. Only since Osborne had the bottle to lower the higher rate again has the economy started to take off.

        • 43
          Glyn H says:

          Well thats income tax rather that corparation tax but it leads to the question: What would happen to the tax take if it was reduced back to 40% (still high). It would likely increase the take and Osborne was surely a fool to not reduce it immedately after the 2010 election. Liberal financial f******ds or what?

          • Norfolk's Finest says:

            We should get rid of Corporation Tax altogether. It only represents a small portion of the government’s tax take and if it disappeared, we’d be swamped with businesses the world over rushing to set up shop here and that would increase employment opportunities overnight. We’d go from having an economy that’s relatively in the doldrums to having an economic powerhouse within a couple of years and Britain would once again weald an almighty cloud on the world stage – effectively we’d have an empire again: a commercial one, if not a sovereign one.

        • 62
          HEARDITALLSEENITALLBEFORE says:

          To Brown it was the LAUGHER curve.

      • 61
        Pick litter for bennies says:

        Both practised “pyramid monetary economics”.It was always going to end in tears or bankruptcy when there was no more investment.

    • 28
      dai laffing says:

      some economists are right some of the time

  2. 2
    Bill Quango MP/7 says:

    I see no mention of the magic money tree?

  3. 3
    Wait - what! says:

    Every left winger with a brain cell has now exploded – the air is full of Guardian confetti and the BBC are refusing to acknowledge the story.

  4. 4
    lulu says:

    Please can someone inform the two Eds that is is not a “cost of living” crisis but a “cost of Labour” crisis that the current goverment is trying to address

    • 5
      (Not so)Dangerous Brian says:

      So, no more boom bang a bang and bust then Lulu?

    • 7
      la la says:

      Since 2005 productivity has not improved one iota. Adds up to 20% PLUS pay rise.
      Thanks to Brown, Balls and Miliband.

    • 40
      HEARDITALLSEENITALLBEFORE says:

      Also can somebody please explain to the cretin that by keeping on lisping the phrase ‘cotht of living cwisith’ will not make it a catchy little number rolling off everybody’s tongue.

  5. 6
    An Awkward bastard says:

    So now our George is concerned about increasing GDP .

    Well here is a good one; every Bank Holiday loses 0.1% of GDP.

    Cut 5 Bank Holidays out and GPD increases 0.5% resulting in 150,000 new jobs and new revenues for the Treasury.

    Go for it George.

    • 22
      On the beach,sunglasses in the car says:

      if you think this lot can think outside the box to improve economic life for us all by simple cost effective solutions you are mad.

      As long as they get their flights to South Africa, chauffeur driven cars and have sautéed mushrooms in the canteen they are happy.

    • 45
      Office drone says:

      Cut 5 Bank Holidays out and GPD increases 0.5% .. but people will be working 2.1% more. Not very efficient and it punishes the workers, not the benefits claimants.
      The krauts seem to do alright with 10 days average plus 30 days leave

  6. 8
    AnusButtocks says:

    The ‘left’ are fucking worthless, parasitic, state money craving, never had a real job, working class despising, traitors, and general filth

    The best examples of this are the vermin wot spew leftist shyte on radio five cu’nt, and the Guardian

  7. 9
    Ballox Economics. says:

    They are many advocates for Laffer Curve. It is not as silly as it sounds.

    • 21
      Dr Doom says:

      As there are for the J curve which correlates tax rates to aggregate sums collected.

    • 26
      The Green Fairy says:

      The Laffer curve is one of the few bits of economics that is actually based on rigorous mathematics. If you tax at 0% you collect no tax (obviously); if you tax at 100% you collect no tax (because there’s no economic activity) – so (pure mathematics requires) somewhere between the two there is a tax rate that maximises your take. Where that percentage is to be found, is another question …

      • 38
        JH3-094-03294-320 says:

        Another question is whether the state exists to maximise the tax take in the first fucking place.

        They should provide a minimum package of those services best supplied by the state at the absolute minimum cost. End of story.

        There should be no bullshit about needing to pay highly to ‘compete’ with private sector remuneration for the simple reason that the state is not competing with anyone – the operation gets its money whether successful or not and cannot go bust.

      • 41
        FFS says:

        It is usually a simple matter to work out where by looking at historical data and making comparisons with other similar industrialised nations.

        However, politics then gets in the way…..

        It is easier to look at the matter from a different perspective. If you have a trade deficit then you have too little resource in the private sector and too much in the public sector and thus you need to re-balance. This inherently means reducing public sector spend to free up more human resource and more capital for the private sector.

  8. 10
    Milibandwagon says:

    This shows just how out of touch George Osborne and David Cameron are, and is the sort of nonsense which could only be dreamed up by people who have never had a proper job, are financially supported by other members of their own family and/or who went to public school.

    Must go now: I have a meeting with Harriet and Tristram and then have to be at home to make sure it is clean before my wife gets back from her day job of charging squillions for being a barrister. After all, if I wasn’t the cleaner then nasty people would say that I have never had a proper job in my whole life …

  9. 11
    william says:

    Anybody remember the increase in tax revenues when Nigel Lawson cut the top rate of income tax to 40 percent?

  10. 13
    Bix Beiderbix says:

    Well the US Federal Reserve and their greatest acolyte Mr Paul (thicko) Krugman have been using this pea-brained logic for the past 5 years on money-printing forthe US money system, and destroyed the western world (or haven’t we noticed).

  11. 15
    herewegoagain says:

    You know, I often wonder what would have happened if our elite had spent all their lives in export led business?

    Of course they would have had to deal in foreign languages and foreign cultures, they would know that to succeed they had to have the world’s best engineers, scientists and mathematicians. and they would have organised society to achieve this.

    Instead they take the easy route, Eton, Oxford PPE and a comfortable living the old boy network….

    And BoJo et al think this is survival of the fittest…..

    • 27
      A cheeky scouser says:

      Although I have a degree my Dad was not a Bank Manager.

      I have failed to land three jobs after being interviewed .

      In all three cases the successful candidates were the sons of Bank Managers.

    • 34
      FFS says:

      The purpose of Eton is not to take a high achiever and educate him well.

      The purpose of Eton is to take a complete duffer and disguise his inadequacies through connections to other duffers in high office.

      • 48
        Office drone says:

        I thought it was to teach our future leaders how to take it up the shitter without blubbing.

  12. 17
    Gordon Brown says:

    Tax-cuts take money out of the economy.

  13. 20
    Mark Wouters says:

    BundesStagRacoon Here yet again LOL,
    Well is Mr.Philip Hammond MP a “GOCO dancer “or a “Lip dancer”or a heaven Knows only term will tell !! defence is not a private affair as he Now sees

  14. 24
    mark wouters says:

    BundesStagRacoon Here ,
    Well is Mr.Philip Hammond a GOCO Dancer a LIP dancer or a Lap Dancer or just a silly chancer !!!!
    Defence is not a private affair as hes about to see ,he and all other mps and civil serpenat are answerable to people like me!!!! Tee heeeeeeeeeeeee.

  15. 25
    BBC intern says:

    Who needs an economic model to realise that if you raise taxes, people will try to avoid them, if you lower them, they are more likely to pay? The Left are ideologically obsessed with the idea that you have to raise tax levels becos the nasty capitalists are secreting their money into offshore accounts. Not something the Left would ever do, of course. *innocent face* (without prejudice, m’lud).

    • 36
      FFS says:

      “if you raise taxes, people will try to avoid them”

      I don’t think tax avoidance is the problem so much as highly productive people taking very early retirement, or only working three days a week, or leaving to go and run a B&B in Provence.

  16. 29
  17. 37
    bartfartbastard says:

    Oh yes, it works for companies. Yes. Definitely proven. Good stuff. Sound economics. Jolly good show.

    But no cuts for people until the next decade. This is obviously on the premise that Dave and Georges’ mates don’t do anything as vulgar as pay tax in the UK, whereas their companies just might.

    Really, the Tory Party only needs a 30 second party political broadcast in the run-up to the next election. A blank screen with a cheap actor saying “Fuck off and die” should suffice.

  18. 39
    JFK says:

    “…In short, our primary challenge is not how to divide the economic pie, but how to enlarge it.”

    “…Every dollar released from taxation that is spent or invested will help create a new job and a new salary. And these new jobs and new salaries can create other jobs and other salaries and more customers and more growth for an expanding American economy.”

    “It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now … Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”

    etc, etc, etc

  19. 47
    Andy says:

    Ok so you’ve basically just ripped off this article from last week in City AM

    http://www.cityam.com/article/1386209087/george-osborne-may-have-just-rediscovered-laffer-curve

  20. 54
    Anonymous says:

    Oh come, now. You’ve not emdeared yourself to all the Guido readers and bringing up Laffer just puts you into Cuckooland. I’m a small governmenter, but also an economist and this is bunkum. You’ll be quoting Rand soon.

    • 58
      Lady Lord says:

      Funny tho’ that the reduction in the top rate of income tax from 50% to 45% has brought in more revenues and the increase in the rate of capital gains tax has brought in less revenues

      Can you lefties really keep calling it a “tax cut for millionaires” when revenues paid by the rich has risen

    • 59
      Cabbage says:

      Nah. You’re not an economist. I, on the other hand, am and I say you’re talking cobblers.

  21. 60
    David Cameron says:

    No, honestly, I’m a low tax Conservative. I know it sounds like bollocks but I am, really I am ( apart from anyone earning over 40k but you lot don’t matter to me).

  22. 63
  23. 65
    Pick litter for bennies says:

    Generally the coalition are cutting taxes and welfare and enshrining these in law+OBR so that Labour may? inherit a small pot of money to dish out to their clientele.Keep it up and go deeper.

  24. 67
    Vacant Possession says:

    …and it took four years for this to come out?

    Should have been day 1 in office, along with an EU referendum date within 9 months of entering office.

    We wouldn’t have Tory infighting and the rise of UKIP if Cameron had had the courage to do it then.

    He might have been able to get democracy back again on the back of the tide of public support with boundary reform. Where is democracy when the results are skewed?

    Unfortunately political cowardice and posturing defines the coalition. IDS & MG excepted here.

  25. 69
    John Milton Keynes says:

    I have long proposed a ‘Lefty Tax’. I propose that we identify well paid lefties and hit them with a ‘Hollande’ – a 75% rate kicking in at all income over £50,000. Think of the extra revenue to be gained on Rusbridger’s £600,000+ package, for example.

    The beauty of this scheme is that the lefties will back it. They like high taxes. They want large revenues to go to the state. I’m right about this, am I not lefties? You will back it?

  26. 73
    Lord Gaga says:

    We should have a duffer curve. It may not be possible to show how reducing taxation improves the exchequer, but showing that increasing it kills business its pretty simple. You only have to look at what tax on beer did to the affordable pint and the pub trade to see it in action, or look at the impact of business rates on the high street.


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Cathy Jamieson MP, Labour’s Shadow Treasury minister, commenting on Treasury analysis of the economic impact of tax changes…

“If the Treasury is looking at the economic impact of tax changes, then surely it should examine the impact of the rise in VAT and cuts to tax credits? George Osborne’s £12 billion VAT rise knocked confidence, helped to choke off the recovery and has cost families £1,350 over the last three years.”



orkneylad says:

What’s he been doing FFS, mining bitcoins?


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