Continuing the series on just how poor debate in the political arena has become, it’s time to look at the discussion of marginal tax rates, and by extension, the Laffer Curve and ‘trickle down‘ economics. These two represent the main (technocratic) arguments against higher marginal tax rates, so I will deal with them in turn.
The Laffer Curve
So goes the argument: don’t raise taxes on the rich, they will work fewer hours, move abroad, create less wealth, and so forth. It’s usually accompanied by logical ‘gotchas’ like this:
It’s intuitively appealing to people like us of course and as with the Laffer Curve at extremes it’s clearly and obviously true. Zero tax means zero government and without at the very least some form of defense, police and a criminal justice system there’s not going to be much economic growth. When the government takes and spends all of the economy there’s not likely to be much either.
Of course, even this isn’t true. The USSR effectively had 100% tax rates, give or take a few incentive schemes, and managed to achieve positive growth rates throughout its existence. At the other end, whilst I’m not much of an anarchist, no government doesn’t necessarily lead to no growth whatsoever, as demonstrated by various stateless and taxless communities across the ages.
Why? I can think of a few reasons:
- Economic rents are pervasive – as Schumpeter said, they are the ultimate aim of any capitalist firm. Taxing this unproductive activity discourages it and therefore encourages productive activity, meaning higher taxes can increase income. Michael Hudson’s video on this is recommended.
- As Kimel notes, if you reinvest your income it is tax deducted, which means that higher marginal rates will encourage investment.
- If a rich person can avoid/evade tax, they will – doesn’t matter how high the rate is.
- Corporations and rich people aren’t as mobile as they’d have us believe, as there are legal and personal barriers to simply upping and moving abroad. As Ha-Joon Chang says, ‘Capital has a nationality’.
Whatever the reasons, the evidence is fairly conclusive: the Laffer Curve is a useless idea; there are so many conflicting factors that it probably resembles a rollercoaster at any one time, and something like a chaos pendulum over time.
‘Rich people create jobs’ is a mantra that is often repeated – sometimes, for obvious reasons, by rich people themselves, but even more sadly by useful idiots. Perhaps they revere the rich; possibly they expect to join them one day (of course, probability suggests that they won’t).
The basic fact is that jobs are created by demand. Ask any employer – a firm hires people if there is enough demand for its products to warrant said hiring. To the extent that taxes and regulations have a negative effect, it tends to be higher prices. What’s more, this obviously occurs more in firms who can afford to increase prices; that is, those with market power – the richest ones. In other words, higher taxes have the least impact on the hiring practices of the rich.
What’s more, when there is demand, it is small businesses who create the majority of jobs – a study by the University of Nottingham estimates their share at 65%. So the argument holds no water by any metric.
In summary, the Laffer Curve simply doesn’t exist in its napkin form, and trickle down economics is completely incoherent and at odds with all the evidence. No wonder they’re all that Republicans can talk about.