A million Laffs

In her haste to protect the super-rich from the inconvenience of paying tax, The Australian’s Janet Albrechtsen misapplies the so-called “Laffer curve”, which hypothesises an optimum tax rate which maximises revenue and beyond which revenues fall due to decreased economic activity (“Let champagne socialists pay more tax voluntarily”,12/10).

She gives us a couple of anecdotes of increased revenue at lower tax rates – as a percentage of GDP. But Laffer’s theory is that decreased tax rates result in greater tax revenue through increased economic activity so, by normalising to GDP, she is not saying anything about the Laffer curve, only that those who can will simply move their money around to where it is taxed least.

For example, any higher revenues from capital gains which occur when the rate is lowered only prove that people hang on to assets until this occurs, providing only a one-off tax windfall.

As far as income tax goes, most quantitative studies of the Laffer effect put the optimum rate at about 70%. I’d like to see that.

Of the top 1% of income-earners, Albrechsen says: “When you tax people more, their incentive to work more and earn more income drops off”. News flash: that’s not how the super-rich make their money.

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