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A new twist on the Laffer Curve


The Laffer Curve is a description of the theoretical optimum point of taxation rate on a population. It implies that there’s a ’sweet spot’ of taxation where the most income is generated for government coffers. Set the taxation rate too low and the government misses out on potential revenue. Set it too high and an increasing proportion of the population finds ways to avoid tax, moves abroad or simply works less because the extra effort isn’t worth the reduced extra reward.

What the Laffer Curve doesn’t explicitly take into account is the effect on a population of the perceived morality of public spending.

For example, while an argumentative person might perceive taxation to be nothing more than demanding money with menaces, and the government to be simply the mafia by another name, that person wouldn’t necessarily object to paying taxes if the money collected was spent efficiently on things that benefited the wider community and, either directly or indirectly, that person’s life.

Examples might be effective healthcare through a reduction in unnecessary layers of management, best business practices through the reduction of red tape, good education with the accent on questioning and rational thought, and, in my personal opinion, the distinct lack of a surveillance state.

Experience has shown that the public is remarkably resilient when it comes to believing that government taxation and spending is beneficial. In spite of numerous examples to the contrary, there has been an underlying perception that the government – of whatever colour – is overwhelmingly ‘good’ and that only ‘good’ people enter politics because they want to make a real difference. The few obvious black sheep over the years have failed to puncture this belief.

And perhaps it was valid in the past. But whether politics has changed or merely the perception of politics has changed, that belief has gone. Opinion polls (for what they are worth) now show significant minorities, and in some cases majorities, of the population having no faith in politicians or the political establishment. Criminal and civil actions are likely to be launched against sitting members of parliament. The mood is far from pretty.

So what has this to do with economics? Everything.

Economics is faith-based. The belief that we live in a capitalist system where hard work and ability are rewarded is what underpins all efforts at innovation and entrepreneurship. It has been blown away.

Bankers fail spectacularly and are rewarded with huge pensions, cosy sinecures and, when their bonuses are under threat, higher salaries to compensate. Politicians fail to prevent foreseeable economic disasters while governing through implied force rather than real consideration for their constituents, and not only reward themselves with ‘expenses’ and CGT-free house sales profits, but conspicuously fail to realise, almost to a man/woman, that what is at stake is not the money or ‘the rules’ but the basic belief that the ‘mother of all parliaments’ is a place of morality and integrity to which the entire country, perhaps the world, can look up.

What comes next might be the ‘me first’ time. What politicians sickeningly call ‘ordinary people’ and ‘hard working families’ look at what they see in the banks and the houses of parliament and think, “That’s where my money is going? Why am I giving so much of my work* to these thieves, wasters and incompetents who either give it away to their friends and family, spend it on their homes as ‘expenses’ or use it to bail out bankers who will then employ them as ‘consultants’ on huge salaries when they leave parliament?”

“What’s in it for me?”

Tax rates in the UK are projected to rise after the next election, whenever that may be, in order to start to pay back the frankly staggering levels of borrowing currently being racked up by Labour. But I wouldn’t be surprised to see the UK tax take, already well down on last year and below projected government figures, drop even further as those ‘ordinary people’ and ‘hard working families’ decide that they’ve had more than enough of giving their increasingly scarce money to thieves and spendthrifts.

* For most working people in the UK, your entire salary from January to May goes to the government in taxes.

(c) Alex Cruickshank 2009

The author is still paying his taxes and will continue to do so, but may soon be in a minority.

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