Tax Policy

Today's London Guardian takes on Blair's opposition to higher taxes on the wealthy:

On the scale of jaw-dropping claims by politicians, Tony Blair's remarks on the "myth" of higher tax rates were pretty seismic. Displaying a hitherto unknown expertise in accounting, he boldly predicted that introducing a 50% tax rate on incomes of over £100,000 [$184,000] would fail to raise the extra billions that its supporters predict.

In his interview with the Guardian yesterday, Blair went further: "Every single piece of analysis that has ever been done indicates that ... large numbers of those taxpayers - probably the wealthiest - would simply hire a whole lot of new accountants to do this and that. And actually your tax take would be a lot less."

The editorial goes on to explain the basis for this assertion:

The only explanation is that Blair was referring to the famous "Laffer curve", conceived by the US economist Arthur Laffer in 1974. Laffer's diagram was a simple bell curve, illustrating his idea that growth in tax revenue falls away after a certain point, as higher rates of tax give people less incentive to work and a stronger incentive to evade paying.

The Laffer curve has become the holy grail of low-tax, rightwing politicians, especially in the US, where it was warmly embraced by the neo-conservatives who clustered around Ronald Reagan in the 80s, and continue to cluster round George Bush.

But like the holy grail, the Laffer curve is an article of faith, not a rigorous piece of analysis. Laffer himself was clever enough never to put any hard numbers on his curve, and no piece of research has discovered the "sweet spot" that would maximise tax revenues.

More importantly, Laffer's curve - which he sketched on the back of a bar napkin - was the product of an era in which some countries, including Britain, had tax rates as high as 98%. In the 30 years since Laffer drew his curve, the entire tax structure has changed markedly, with a shift to value-added taxes.

The editorial notes that fears that the rich would utilize tax shelters and havens are misplaced, as the rich already shelter their income from taxes. It also points out that tax avoidance is driven not only by tax rates, but also by the complexity of the tax code, "hence the ceaseless process of closing loopholes that absorbs so much energy of the officials at the Treasury and the Inland Revenue." It responded to an argument Blair once made about driving wealth abroady by noting that one of Britain's most famous footballers, David Beckham, moved from the UK (with a 40% maximum tax bracket) to Spain (where the highest rate is 50%). It also provides a reductio ad absurdum) of Blair's argument which " taken to its extreme, is not an argument against a higher tax rate, it is an argument for no tax at all" Finally, it notes that raising the maximum tax bracket would be much easier to implement and enforce than Blair's proposed "top up fees" for University students.

Like it or hate it, it is an important argument. Britain doesn't coddle the rich to anywhere near the extent of the Bush Administration, but a major newspaper remains free to challenge his tax policy and to suggest that it may be better to increase taxes on the rich than on the working classes. There is not a blind obedience to the notion that tax cuts and low tax rates for the rich benefit everybody, let alone one coupled with the notion that increasing the tax burden (and decreasing the public benefits available to) the working classes is appropriate. It's not a lonely Paul Krugman challenging the President's tax policy, while the nation's corporate media blithely ignores the issue.

Whatever you think of tax policy and the structure of the U.S. tax system, all taxpayers would benefit from a vigorous and public debate over its precepts, and over possible reforms focused on making our nation's taxes more understandable, more simple and more fair. When the Bush Administration provides staggering tax relief for the rich, associated with meager tax relief to working families which he knows will soon be largely clawed back by the "Alternative Minimum Tax", and his deception passes pretty much unchecked by either the opposition party or the media.... Well, at a certain point you have to ask yourself if the American people want to be deceived.

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