Raising taxes

Fiachra2

There seems to be a reasonable level of consensus among economic commentators that increasing income tax rates beyond a certain level is self defeating and that overall revenues decline. Can anyone recomend an authoratative article which explains why this happens?

Thanks

murphy93

No but collecting taxes would be good.
We have higher taxes than Britain but actually collect less and they seem good at avoiding them. We must be chart toppers at it.

Time Magazine

Fiachra2 wrote: »

There seems to be a reasonable level of consensus among economic commentators that increasing income tax rates beyond a certain level is self defeating and that overall revenues decline. Can anyone recomend an authoratative article which explains why this happens?

Thanks

The concept is the Laffer Curve, though I'm not sure if it was ever published as an academic article. The logic is simple. Tax revenues at 0% will be $0. Tax revenues at 100% will be $0, because people will not work for nothing. If tax revenues are positive at some point (e.g. 20%), then there has to be a point where an increase in taxes lowers tax revenue. It's still empirically ambiguous where that point is.

(Btw just to add that we're probably not there yet.)

nesf

Fiachra2 wrote: »

There seems to be a reasonable level of consensus among economic commentators that increasing income tax rates beyond a certain level is self defeating and that overall revenues decline. Can anyone recomend an authoratative article which explains why this happens?

Thanks

Two ways it effects people:

a) it disincentivises working versus taking the dole. The dole isn't taxed, so low income work starts looking a lot worse if even an extra 5% is added to the lower tax rate.

b) it encourages tax dodging. Moving overtime from recorded to unrecorded and moving income from pay to expenses and similar shenanigans. This is especially true for the self employed who can earn income in various ways and who generally have accountants good at figuring out ways to minimise tax.

What this means is that for each % point you add to the tax rate you're likely to get somewhat less than you got for the previous % point of tax. Then "scale effects" start coming in, i.e. people are a lot less likely to react to a 1% hike in tax than they are to a 5% or 10% hike in tax. You can get away with it easier by slowly increasing tax levels rather than sharply increasing them (this is exactly the principle used in reverse with cigarette taxes, they try to increase it in sizeable jumps precisely so people will react to it).

Fiachra2

Thanks folks (but go easy on the accountants..I am one!)

I am advising someone on this matter who may well be a TD after the election.
I can follow the logic of the laffer curve which makes perfect sense but obviously the problem then is how do you know when you are at the top of the curve and that further increases will lead to a negative result. Has anything been written on indicators that are helpfull in estimating the top of the curve?

(The obvious option is small increases and monitor the result but this could be tricky in a climate where tax takes are falling.)

nesf

Fiachra2 wrote: »

Thanks folks (but go easy on the accountants..I am one!)

Nah, it's natural in a tax system that a profession (or a subset of a profession as is the case here) will exist to minimise exposure to taxation. Bit like how if you have a legal system you got to have solicitors and barristers.

Fiachra2 wrote: »

I am advising someone on this matter who may well be a TD after the election.
I can follow the logic of the laffer curve which makes perfect sense but obviously the problem then is how do you know when you are at the top of the curve and that further increases will lead to a negative result. Has anything been written on indicators that are helpfull in estimating the top of the curve?

(The obvious option is small increases and monitor the result but this could be tricky in a climate where tax takes are falling.)

Like many things in economics, you can't know until you pass it and that's the problem. But as a general rule tax take tends to decrease per percentage point as a tax rate increases. Though reality is a hell of a lot more complicated than this simple rule.

cavedave

Would a property tax based on house value lose money? This is not exactly the same issue but it does seem related.

Here is my reasoning

Say you bring in a tax based on the value of property. I believe at some point we will need this tax and it will bring in about 1 billion a year.

Will a property tax cause a bank recapitalisation that will in the short term cost more than it makes?

"The average price for a house nationally in Quarter 3, 2010 has now fallen below EUR 200K " and there are "1,500,000 houses in ireland" from here

Say half the people buying a house give a sneaky 20 thousand cash payment to the owner. This is to make their tax bill lower because they can say "my house cost 180K not 200k". And because it is only 10% you could argue 'the owner wanted to get a quick sale so that's why it was cheap". This is 5% of the average price. So it would imply property tax reduces the average house price by 10K or 5%.

That would mean banks asset sheets would go from the current 300 billion of house values to 285 billion.

Back of the envelope a property tax would take roughly 15 billion off banks asset sheets. How much recapitalisation would this require? Is there an evidence from countries like France that a value property tax does cause people to undervalue property?

Will a property tax on value cause people to officially undervalue their houses when they are bought? What happens to the banks if the value of houses suddenly drops 15 billion?

nesf

cavedave wrote: »

Would a property tax based on house value lose money? This is not exactly the same issue but it does seem related.

No because it doesn't discourage work only home ownership. So arguably you might see fewer people buy houses but people who already own them will just have to grin and bear it.

cavedave

No because it doesn't discourage work only home ownership. So arguably you might see fewer people buy houses but people who already own them will just have to grin and bear it.

How so? Say your house is valued at 200 thousand. If you can point out several similar houses in the area sold officially for 180 thousand surely the value of your house on bank and government lists would have to lower?

nesf

cavedave wrote: »

How so? Say your house is valued at 200 thousand. If you can point out several similar houses in the area sold officially for 180 thousand surely the value of your house on bank and government lists would have to lower?

Would depend on the system used to calculate tax.

cavedave

nesf

Would depend on the system used to calculate tax.

But would it change the value of houses on the banks balance sheets? The tax is not really the issue here only its effects on the banks balance sheets.

nesf

cavedave wrote: »

But would it change the value of houses on the banks balance sheets? The tax is not really the issue here only its effects on the banks balance sheets.

No not really. The two valuations could be completely separate.

Time Magazine

Fiachra2 wrote: »

Thanks folks (but go easy on the accountants..I am one!)

I am advising someone on this matter who may well be a TD after the election.
I can follow the logic of the laffer curve which makes perfect sense but obviously the problem then is how do you know when you are at the top of the curve and that further increases will lead to a negative result. Has anything been written on indicators that are helpfull in estimating the top of the curve?

(The obvious option is small increases and monitor the result but this could be tricky in a climate where tax takes are falling.)

Yes there is work done on estimating where countries are at on the curve but it's very technical work that non-economists are unlikely to understand easily. The best one I've seen recently is by Harald Uhlig. It obviously carries a lot of assumptions but concludes that Ireland (at least in 2006, or so) was about as far away from its Laffer curve maximum as anyone in Europe. The paper found that nobody in Europe (even Sweden) had income taxes too high.

The Laffer Curve is a useful tool for thinking about setting taxes too high and how additional taxes will yield lower returns (as nesf points out). However its ubiquity in public discourse is probably more an indication of conservative dogma than a view among economists.