Monday, 6 November 2017

What's The Laffer Curve?

All except one of the political parties at Holyrood appear to be agreed on the need for higher taxes to finance public services. Apparently we ought to be asking ourselves ‘What sort of country do we want to be?’

Now in any economy there are generally more far more poor people than rich people. If you ask the majority whether they would like something for free and would like the minority to pay for it, it would be quite surprising if you got a negative answer.

However to pose such a question actually begs a logically prior one. Will the rich minority be happy to stick around and pay up?

Scotland already taxes businesses more than the rest of the UK and has a lower threshold for the top rate of income tax. Without more detailed analysis it would be simplistic to suggest that its relatively high taxation is a significant contributor to Scotland‘s growth rate lagging behind the UK average. I suspect however most economists would agree that the impact is most unlikely to be positive.

Further tax increases may damage investment and encourage businesses to locate on the southern side of the border. Mobile workers may follow.

If personal taxes are raised, self-employed Scots may start to consider forming companies so as to pay business tax to the UK government instead of income tax in Scotland.

In short, there’s a danger of passing the point of peak revenue in Scotland’s Laffer Curve; not only might putting taxes up reduce government revenue, it may reduce the tax base itself.

We should bear in mind that it was Scottish choices on issues like student fees and care for the elderly that led to a situation in which Scotland spends about £1,300 a head more than England.

Perhaps it’s time to ask ourselves not ‘What sort of country do we want to be?’ but ‘What can we actually afford?’

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