It is said that if a Brit is feeling doubtful about being a
part of the European family then a 6-month stint in the US will cure him of those doubts. That seems like overkill when in fact all it takes to be a confirmed European is an
awareness of the political debate in America. And that is despite the seemingly insane situation across
the channel where France is on a trajectory to elect a 1970’s style unreformed
socialist and Angela Merkel – if she’s not bluffing – is apparently going to
let the whole eurozone blow up for the sake of maintaining Germanic principles
of fiscal discipline.
France has apparently found a time machine
in the guise of Francois Hollande who will transport a country that was
timidly, gingerly experimenting under Sarkozy with the idea - if not the
implementation - of being something other than an anti-Anglo Saxon outrider, back
to the Mitterrand era. Mitterrand 1.0 that is - pre-1983.
The second largest economy in the Eurozone - already knocked off the AAA sovereign peak - is apparently
turning left onto the path of extreme fiscal irresponsibility at the very same
moment that Germany is massaging the throats of Greece, Spain & Italy to
continue swallowing the pills of ever more austerity whilst blocking off the
obvious solutions to the two larger of these troubled countries’ solvency issues.
But if this seems bonkers, just take a peek across the
Atlantic. The Republican Primaries
have boiled down to a slug-fest between Mitt Romney – a Mormon worth circa a
quarter of a bill’ and Newt Gingrich who refers to one of the world’s most oppressed
peoples as the “so-called Palestinians”.
The former – and favourite for the Republican nomination – paid an
effective tax-rate of under 14% on $40m of income over the last two years. Whilst high marginal rates of tax are counterproductive & the UK’s current – and
apparently ‘temporary’ – top rate of 50% is wrong both in principle and
practice, it cannot be right that someone who is unambiguously rich pays a lower marginal rate than their cleaner.
President Obama, that extreme pinko who apparently wants to
remake America according to the principles of Marx and Engels – if you believe pretty much what any Republican has to say – is simply suggesting that the rich
shouldn’t pay less than 30% of their income in tax. If that is to be imposed as a floor for the effective top rate of income tax - on income and dividends combined - it compares extremely favourably to the top rates levied in just about any European Union jurisdiction.
Definitions of ‘fairness’ are very subjective but can anyone really argue with the so-called ‘Buffet Rule’ that the rich
shouldn’t pay a lower marginal rate of tax than those less well off? This is as
manifestly unfair as overtaxing is counterproductive. Overtaxed - in the form of a 50% rate that represents a political gesture rather than a genuine mechanism for generating revenue - the UK is, and now carries the stigma of being a high tax country. The 50% rate might raise an
additional couple of billion per annum for a year or two before revenues fall
as a result of behavioural changes. But those behavioural changes will happen. People will leave and those who considered coming here will
demur. And it seems that many policy makers have forgotten their Economics 101 class and the ‘Laffer Curve’ – a bell shaped
graph that seeks to represent the highest marginal rate than an economy will withstand
before the disincentives of ever-higher rates kick in and revenue is
reduced. In a European context
this is widely considered to be circa 40% on income. In the US, given a valid cultural allergy toward tax, it is probably lower. There are compelling arguments as to why the rate of capital gains tax should be competitive - lower - to encourage entrepreneurship but a marginal rate of 15% on both capital gain and dividend income when most Americans are paying between 25% and 35% on wage income is indefensible. And who do American voters have to thank for the current mismatch? George W Bush of course.
Hi Ceawlin, nicely written article... I would add, in a Fractional Reserve System where FIAT currency is in circulation, there isn't too much choice from the govt's perspective but to tax people to raise the required cash to service the interest on the currency - currently 42bn pr annum just for the Govt portion. The deeper issue surely is, why is "the west" using a currency that is loaned to us with interest? It seems an impossible problem to be charged interest on money itself. This means the interest portion of sterling in circulation today does not exist! This drives many financial problems and propaganda. Who benefits from this / are the shareholders today, owning the Bank Of England? I suspect the press do not report on this rather unsavoury situation, to avoid the inevitable public backlash. Keep sheeple in the dark essentially.
ReplyDeleteA good and entertaining rant, Karl, but I have two objections:
ReplyDelete1
George W Bush is not the only one to blame for the current mismatch. We have seen cuts on income taxes for the most affluent in almost all Western countries during the last 30 years and corporate taxes as well as property taxes were reduced even more. Even so-called centre-left governments did this, like Schröder in Germany. To quote Warren Buffett: "There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning."
2
It´s remarkable that there don´t seem to be any economists who bother to gather empirical evidence for the Laffer Curve. We simply have no idea if it´s a bell-shaped curve or something else altogether and where exactly there is a peak. It could look like a linear increase or it could have more than one peak or even no peak at all, but a plateau. Some Americans had to pay 91% income tax during the Eisenhower years and there is no evidence for mass emigration of the rich, behavioural changes or a collapse of revenues.
I have the suspicion that the Laffer Curve was only invented for politicians - the idea is simple enough that even the biggest morons get it in 10 minutes and then can talk about it for 10 years.
[/rant]
Regards,
Klaus
This comment has been removed by the author.
DeleteDear Klaus, before "79 there was a top rate in the UK of 98% and trust me, if you will, this - amongst a number of ill conceived policies - generated a massive brain drain and economic ruin to the degree that the IMF had to step in in '76. US citizens were (and are) always much less likely to emigrate but do you really doubt the disincentive to starting a business if the majority of the fruits of your labour will be confiscated? Furthermore, you dont have to go back to Eisenhower to find a high tax USA. Under Carter the top rate was around 76% and under Reagan and Thatcher respectively these top rates were cut to circa 40% in both countries but with dramatically differing trigger points. One thing that does seem to be empirically clear is that the lowering of the highest marginal rates coincided with substantially increased revenue both for the UK and US. Of course other drivers were also at play but the 'incentive argument' - if it is to be undone - needs more than your speculation above. Like the Phillips Curve - which has actually proved to be false over anything beyond the very short term - the Laffer Curve was distilled by an academic so I think you were playing a tad fast and loose with your last statement.
ReplyDeleteNah, that was not fast and loose, in my humble opinion! Remember what a bunch of Nobel Prize economists did with LTCM? Our faith in them shouldn´t be excessive.
ReplyDeleteOf course, I agree that extreme actions are likely to provoke extreme reactions. I´m not arguing for a 91% top income tax, but the fact that America had it, without a collapse of revenue, shows that reality is not as simple as Laffer wants to make us believe. The country was in a desperate situation after a long depression and in the middle of a world war, which obviously made high taxes more agreeable than they would have been otherwise.
There is an aversion against taxes in America because the mantra "government is not the solution, it´s the problem" had been preached for decades. Thatcher went even further, claiming that "there is no such thing as society".
Income tax revenues did NOT increase spectacularly in the Reagan years, see here:
http://upload.wikimedia.org/wikipedia/commons/0/07/U.S.-income-taxes-out-of-total-taxes.JPG
The numbers are not adjusted for inflation, which was around 60% in total from 1981 until 1990. If you take that into account, revenue was pretty flat.
Obama´s remarks are populist. He has been in office for three years now and had a filibuster-proof "super-majority" in the first two years. Why didn´t he raise taxes for the most affluent, as he promised before he was elected? Why didn´t he close all the loopholes which allow Romney to pay only 13.9% (the top marginal tax rate is still 35%!).
I would really, really like to see some empirical evidence pro or contra the Laffer Curve, not least because I work on a similar problem in my job: we want to maximise revenue with intelligent pricing strategies.
What Laffer says is rather trivial: revenues are zero for tax rates of 0% and 100% and an unspecified positive amount for any tax rate in between. The interesting news would be: what exactly happens between 35% and 45%? You would think that economists throw a lot of brainpower at an important question like that - I´m sure that a convincing answer would be rewarded with a Nobel Price. But they don´t. Which makes me suspicious that most of them don´t buy the theory in the first place - or think there is no answer to be found at all.
Re: Merkel
Of course, she is bluffing. She wants to be re-elected next year. Her voters didn´t want the Euro in the first place, hence they are now unwilling to pay for saving it. She knows she has no choice, but at least she wants to show her voters she bargained really, really hard.
Actually I stand corrected re your first para. Moreover, it is embarrassing that the term was first coined by Jude Wanniski (then a writer for the Wall Street Journal which is not my favourite paper) after a meeting in '74 between Laffer, Wanniski, and - aaarrrrgggh - Dick Cheney & Donald Rumsfeld!! At least i admitted it before you pointed it out!
ReplyDeleteI do believe in the principle though but discerning the price is a somewhat nebulous exercise.
Let me however take issue with a couple of your comments. Obama is not being a populist but a realist.
Politics is the art of the possible and Obama was being branded - reasonably successfully amongst a not insignificant part of the US populace - as a Muslim Kenyan Socialist who had the misfortune to have the middle name Hussein. Given this context and the fact the congressional super-majority, for as long as it lasted, was spent on healthcare reform (which I imagine you support) and fiscal stimulus (which i guess you also support) it would have been political suicide for Obama to be seen as penalising wealth creators.
However, he probably missed a chance in being too late to endorse the Simpson-Bowles commission's proposals to eliminate many of the loopholes to which you refer. The problem is that so many of the Democratic base found the idea of a reduction in any entitlement spending programme to be politically impossible whilst the Republicans were allergic to any increase in tax revenue even if marginal rates remained the same or indeed were lowered. Thank Grover Norquist for this. Belatedly Obama tried to reach an accommodation with John Boehner on this only to be torpedoed by Boehner who was beholden to the the Norquist/Tea Party movements.
As for the Laffer Curve, the UK Treasury is currently completing an excercise into analysing how much, if any, revenue will be raised by the top rate, on income, having been raised from 40% to 50%. The jury is still out but all predictions are that the report will predict insignificant additional revenue in the short term with a less meritorious outcome over the medium to long term. It will be interesting reading when it is released. Certainly the 50% rate is causing a lot of people to make a lot of noise which contrasts with what was a general acceptance of 40% being tough but fair.
Your reference to Thatcher's comment is a cheap shot taken out of context!
I hope you are right re Merkel.
I'm going to bed, good night!
Cheney & Rumsfeld! I loathe these SOBs, but at the same time I can´t help it, I have to admire them as well. There doesn´t seem to be a single scam those guys are not involved in! No character whatsoever, but political talent in abundance.
ReplyDeleteI googled the context of Thatcher´s comment - you are right, but what she actually said sounds still quite wrong to me. I regard "entitlement programs" as a form of a collective insurance policy of - yes - the society. I´m proud to be a member of a society leaving nobody behind. In (the highly unlikely) event we run our hostel chain into the ground, or I´m fired before that happens, I will not wonder a single second whether my neighbour or society pays for my dole. I have paid it already. I pay my premium every month since 13 years.
As a German citizen, I´m eternally grateful the UK & USA have drafted such a fantastic constitution for my country. I quote the first article: "Human dignity shall be inviolable. To respect and protect it shall be the duty of all state authority."
I´m entitled to a life in dignity! That´s so much better than just "freedom to pursuit happiness", because it protects my dignity in the event that something in my pursuit of happiness goes awfully wrong. A life in dignity is unthinkable without money to buy food and shelter, without healthcare and a pension. My society - NOT my neighbour - guarantees this. I am so proud of this society.
[Disclaimer: every insurance comes with moral hazard. Of course, there should be rules in place to prevent fraud.]
Obama:
Yes, he was successfully branded a Kenyan Muslim Socialist, but already before he was elected. He might just as well have tried to live up to it after the election. He was the first president with a supermajority in Congress since Roosevelt - that´s what I call a "mandate" to ram through some necessary reforms without even bothering to talk with the minority representatives. Just remember what sort of stuff Bush got through, even without a relative majority. Instead of Rahm Emanuel, Tim Geithner and Larry Summers, Obama should have hired Cheney & Rumsfeld, if he really lacked "audacity" to vote down the minority! I suspect he never had the intention, though.
[end part 1]
[part 2]
ReplyDeleteMerkel:
It´s important to understand ze Germans*, Ceawlin! Whenever I make sarcastic jokes about our warmongering and genocidal national character everybody laughs (even Jews!), only the Brits nod in agreement. And WE are supposed to lack humour??? We have changed our business plan! We now buy foreign governments instead of invading their countries! Another, equally important fact nobody knows: we, ze Germans, hate debt like nothing else. There is no other EU country with fewer homeowners. Universities are still free, simply because nobody would go to school if he had to start his career with a load of debt. We´re very, very, very prudent. We loved the Deutschmark more than our football team and could only be talked into the Euro with Kohl´s holy word of honour that we never, ever will have to take responsibility for the reckless habits of other countries.
Now, we´re told that Greek National Rail employees make €65k (that´s the average!!!), that two thirds of Greek doctors declare an income under €12k (yeah, sure, they must have daydreams about careers as train conductors), that Greek gas stations convinced their government they can´t charge VAT because the volume of gasoline varies with the temperature (how is that problem solved in other countries???) and that they all retire a few years after puberty because, well, life is hard.
Can you imagine the outrage in Germany? Our salaries are flat since 20 years, our dignity insurance is reduced to the bare bones, we have to work until we´re 67 and in addition to that, pick up the tab for Greece? Ireland - OK, they have been ruined by banks, not their fault. Portugal, OK as well. But Greece? Merkel will have to pay an extremely high political price for saving them, so it´s only logical she wants something in return: power, and lots of it (her endless bargaining has two other advantages: it keeps the Euro low, which is good news for the German export industry. And it keeps interest on German debt extremely low, even negative for short-term bonds). Unfortunately she´s too narrow-minded; she only tries to appease the German tabloids, but not the Greek. All those austerity bills can´t be forced down on Greece without at least some support of the Greek people. If I were in her shoes, I would ask the Greek government a very simple thing: all ministers and MPs have to publish their tax declarations of the last ten years AND open their doors to a GERMAN tax inspector. Greece has wonderful laws, they just have never been enforced. You go to jail for tax evasion of more than €150k. I´m pretty sure there isn´t a single Greek MP who stole less than that. Instead of being called a Nazi, she would become a Greek honorary citizen - for sending their entire parliament to jail. Her electorate back home would love it just as much.
Nice to learn your government will evaluate the tax hike. I wonder though why that isn´t done all the time everywhere! Our governments must sit of so much data, generations of interns could be kept busy analyzing it!
So much for this time. I´m going to work now, good evening!
* In case you ever need a Gumball co-pilot, I volunteer. There´ll be enough time to tell you everything about ze Germans. I also have 22 years experience in high-speed driving on ze German Autobahn, without accidents ;)
Recommended read: Michael Lewis, "Boomerang". Nothing new about economics, but it has a wonderful chapter about "the secret lives of Germans". Hilarious!