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Posts Tagged ‘Supply-side economics’

A new study from the Adam Smith Institute in the United Kingdom provides overwhelming evidence that class-warfare tax policy is grossly misguided and self-destructive. The authors examine the likely impact of the 10-percentage point increase in the top income tax rate, which was imposed as an election-year stunt by former  Gordon Brown and then kept in place by his feckless successor, David Cameron.

They find that boosting the top tax rate to 50 percent will slow economic performance. And because of both macroeconomic and microeconomic responses, tax revenues over the next 10 years are likely to drop by the equivalent of more than $550 billion. Here’s a key paragraph from the executive summary of the new study.

The country is suffering from a 50%-­plus marginal tax rate which even its architect admits was imposed without economic purpose. Now our analysis shows that the policy is set for failure: at best leading to flat growth for a decade and £350bn of lost revenue. The Chancellor should seize the occasion of the 2011 budget to reverse this disaster promptly, for the benefit of public revenues, economic growth, the government’s standing with domestic wealth-creators, and the UK’s reputation with world business.

The authors urge Prime Minister Cameron to reverse this disastrous policy, but the odds of that happening are very slight. I hope I’m wrong, but I have repeatedly noted on this blog that Cameron almost always makes the wrong choice when deciding between liberty and statism.

President Obama wants to impose similar policies in the United States and there is every reason to expect similarly poor results. I’ve already posted evidence from IRS data showing that the rich paid much more tax following the Reagan tax cuts, so it shouldn’t shock anybody when the reverse happens if Obama is successful in moving America back toward a 1970s-style tax system.

To emphasize these critical points, let’s close with two videos. This first video explains the Laffer Curve and why politicians are foolish if they assume that there is a fixed linear relationship between tax rates and tax revenue.

This second video debunks the notion of class-warfare tax policy.

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I don’t particularly like soccer and I’m not normally a fan of the research of Professor Emannuel Saez, so it is rather surprising that I like Professor Saez’s new research on taxes and soccer.

While Saez may have a reputation for doing work that often is used by advocates of class warfare, his latest research is classic, supply-side economics. He and his co-authors studied soccer players and found that they are very sensitive to marginal tax rates.

They even confirmed that the Laffer Curve is sometimes so strong that governments can collect more revenue by reducing tax rates on the rich. Krugman won’t be happy about this.

Here are some segments from a story about the research in the Christian Science Monitor.

…on one subject, Europe’s soccer stars have an important message for Americans:

Tax rates.

It turns out that highly paid soccer players are sensitive to taxes. They tend to move to those nations that give them a break. Why is Spain’s top league a sudden soccer powerhouse? One reason is tax policy. Why are Denmark and Belgium’s leagues stronger than in other similar countries? Ditto.

In perhaps the first study to provide compelling evidence of a link between tax rates and worker migration, three economists look at this highly paid, highly mobile workforce and make several surprising conclusions:

1) Top marginal tax rates matter to big earners.

2) If you’re going to cut taxes to lure such highly skilled workers, make it a big tax cut. Otherwise, it won’t have much effect.

…Professor Saez and his colleagues found something striking: The leagues in low-tax nations attracted better players and had better teams.

The effect was also pronounced in individual nations that reformed their taxes. For example, Spain in 2004 introduced a new flat rate of 24 percent for foreign soccer players, nearly half the top marginal rate it charged its residents. After that law – called the “Beckham law” because British star David Beckham took advantage of it – Spain saw its share of foreign players increase while the foreign talent in nearby Italy shrank. Tax cuts for foreign players in Denmark and Belgium had similar effects.

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Greetings from frigid Minnesota. I’m in this misplaced part of the North Pole to testify before both the Senate and House Tax Committees today on issues related to the Laffer Curve.

In other words, I will be discussing how governments should measure the revenue impact of changes in tax policy – what is sometimes known as the dynamic scoring vs static scoring debate.

Most governments, including the folks in Washington, assume that tax policy has no impact on the economy. As such, it is relatively easy to measure how much revenue will rise or fall when tax policy is altered. After all, there are only two moving parts – tax rates and tax revenue.

So if tax rates double, revenues climb by 100 percent. If tax rates are reduced by 50 percent, tax revenues drop by one-half.

This is a slight over-simplification, but it does capture the basics of conventional revenue estimating. And it also shows why “static scoring” is deeply flawed. In the real world, people respond to incentives. When tax rates rise and fall, people change their behavior.

When tax rates are punitive, for instance, people earn and/or declare less income to the government. And when tax rates are reasonable, by contrast, people earn and/or declare more income to the government. In other words, there are actually three moving parts – tax rates, tax revenue, and taxable income.

Figuring out the relationship of these three variables is known as “dynamic scoring” and it is much more challenging that static scoring, but it is much more likely to give lawmakers correct information.

It does not mean, by the way, that “tax cuts pay for themselves” or that “tax increases lose revenue,” as GOPers sometimes claim. That only happens in rare circumstances.

If you want to understand this issue and be more knowledgeable than 99 percent of the people in government (not very difficult, so don’t let it go to your head), watch this three-part series on the Laffer Curve.

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The Wall Street Journal uses the clash between the Steelers and Packers as an opportunity to make a much-need point about taxes. Because of Pennsylvania’s flat tax, Ben Roethlisberger keeps a greater percentage of his salary than Aaron Rodgers, who gets raped by Wisconsin’s “progressive” tax system. Packers fans shouldn’t worry about this, though, since even I’m not willing to claim that the negative impact of high tax rates on incentives will have any effect on the outcome of the game.

We won’t predict the winner of this Sunday’s Super Bowl between the Pittsburgh Steelers and Green Bay Packers. But we can report this much: The Steelers will get to keep a lot more of their season earnings, though both team’s players would be a lot richer if they played all of their home games in Dallas. Take the Packers’ fleet-footed quarterback Aaron Rodgers. He made $8.6 million in 2009, according to USA Today’s database of player salaries. Of that, we calculate he paid roughly $680,000 in state and $3.1 million in federal income and payroll taxes. Steeler quarterback Ben Roethlisberger didn’t earn as much, but he got to keep a relatively larger chunk of his haul—$4.6 million of his $7.7 million salary. (This excludes taxes paid to states that tax players visiting on away games.) Unlike Wisconsin, which has a graduated income tax that charges top earners 7.75% on earnings over $220,000, Pennsylvania has a 3% flat rate. Even football players can behold the merit of a flat tax. Of course, both players would keep a lot more of their earnings if like quarterback Tony Romo (salary: $625,000) they played for the Cowboys since Texas levies no state income tax. On the other hand, Packer and Steeler fans will pay if they travel to Texas for the game since Texas’s beer tax is more than twice as high as their home state’s.

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