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  1. #1
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    The Brits Encounter the Laffer Curve

    Here is the Laffer Curve effect in action. In the UK the top marginal rate was increased from 40% to 50% on those making more than declaring £1 million effective in fiscal 2010-2011. This increase was predicted to bring in an additional about £2.5 billion more revenue calculated using a static basis, i.e. no effect on taxpayer or economic behavior which would increase the total revenue for the high income from ~ £13.5 to ~ £16 billion for the 16,000 affected tax payers. What indeed happened ?? For fiscal 2010-2011 the number of affected taxpayers dropped to 6,000 and the tax revenue for the high income bracket DROPPED to ~ £6.5 billion. No estimates on job losses were given. Cuts in gov spending (austerity) have been blamed for the slowdown of the UK economy but maybe it was the tax rate increases.


    The British press is abuzz with the notion that 10,000 millionaires left the country in the interim, and no doubt some did make for their chalets in Gstaad. Others may have brought forward more income in 2009-2010, knowing the higher rate was on its way. No doubt, too, the overall lousy economy took its toll.

    Prime Minister David Cameron decided earlier this year to lower the 50% rate to 45%, meaning we may see at least some of the millionaires return to the U.K. But the figures are another reminder that incentives matter.

    Politicians would love to lay the whole burden of their policies on a tiny minority of the rich, but you can't finance the welfare state on the shoulders of the 1%. That's something for the U.S. to remember as President Obama pretends he can fill a $1 trillion budget hole with tax hikes on "millionaires and billionaires."
    Google – Britain’s Missing Millionaires

    Review & Outlook: Britain's Missing Millionaires - WSJ.com

  2. #2
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    you came to a conclusion based on a "maybe"?
    Not banned yet.

  3. #3
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    Quote Originally Posted by bahueh View Post
    you came to a conclusion based on a "maybe"?
    Well, one happened, then the other happened. What more evidence do you need? I mean, I would rather work less and be poorer than pay more in taxes...wouldn't you?
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  4. #4
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    Quote Originally Posted by foto View Post
    Well, one happened, then the other happened. What more evidence do you need? I mean, I would rather work less and be poorer than pay more in taxes...wouldn't you?
    all suggested increases in effective tax rates are about 3%.

    the comparison is ridiculous at best.
    Not banned yet.

  5. #5
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    Quote Originally Posted by foto View Post
    Well, one happened, then the other happened. What more evidence do you need? I mean, I would rather work less and be poorer than pay more in taxes...wouldn't you?
    I might work less. I would certainly invest differently.

  6. #6
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    Quote Originally Posted by NJBiker72 View Post
    I might work less.
    no you won't.
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  7. #7
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    Quote Originally Posted by NJBiker72 View Post
    I might work less. I would certainly invest differently.
    Of course! Why suffer a small reduction in life style due to higher taxes when you can impose a much larger one on yourself?

    Makes sense to me...
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    j/k lol kthxbye!

  8. #8
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    Quote Originally Posted by bahueh View Post
    no you won't.
    Depends how much the hike is. To 50%? Plus state and local. Is it worth my time to get that little extra? I don't know. At some point, it is no longer worth it.

  9. #9
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    Quote Originally Posted by foto View Post
    Of course! Why suffer a small reduction in life style due to higher taxes when you can impose a much larger one on yourself?

    Makes sense to me...
    Wish I was so lucky to love nothing more than work.

    Working has an opportunity cost of time. Time that I would rather be doing other things.

    Simple concept.

  10. #10
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    Quote Originally Posted by bahueh View Post
    all suggested increases in effective tax rates are about 3%.

    the comparison is ridiculous at best.
    It's an increase in the top marginal rate of ~ 13% (35% increased to 39.6%). The increase in the UK was ~ 20% and look what happened. Revenues did not increase by 20% but decreased by 50%.

    The comparison is valid.

  11. #11
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    Quote Originally Posted by bahueh View Post
    you came to a conclusion based on a "maybe"?
    I'm saying that it's worth looking at. There was a thread awhile back about austerity causing a slowdown in the UK economy but the tax rate increase was not mentioned. Cameron has quickly reduced the top rate back down to 45% which is 12% higher than the previous 40% and just slightly less than Barry's proposal of a 13% increase in the top US marginal income tax rate. Too bad we won't have the data from the UK to learn from although the 20% increase data is devastating.

    But as Barry replied when asked about the increased revenue resulting from a reduction of the US cap gains tax rate - it's a question of fairness, not revenue. Place left foor over right foot - shoot self in left foot. This is the guy you vote for.

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    Could always look at Romer and Romer, the very study you linked to when you liked the results, and see that available data points to tax increases for deficit reduction having a positive effect

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    Quote Originally Posted by NJBiker72 View Post
    I might work less.
    Or you might work more

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    Quote Originally Posted by coreyb View Post
    Could always look at Romer and Romer, the very study you linked to when you liked the results, and see that available data points to tax increases for deficit reduction having a positive effect
    The words they used were "suggestive evidence" which doesn't prove anything and is a strategy that was not "suggested" by Ms. Romer as a recovery strategy. The main conclusion of the paper is "an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent."

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    Quote Originally Posted by AM999 View Post
    The words they used were "suggestive evidence" which doesn't prove anything
    whereas incomplete data like we have here is much more worthwhile
    Quote Originally Posted by AM999 View Post
    The main conclusion of the paper is "an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent."
    and?

  16. #16
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    Quote Originally Posted by bahueh View Post
    no you won't.
    Sure I would. Think about it this way: after working 8 hours in a day I can continue working and only get to keep half of what I make or I can go home and enjoy some time away from work. At some point, the marginal tax increases means that you are making less for the extra effort than you deem the effort worth.

    Economists call this principle 'opportunity cost'.
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  17. #17
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    Quote Originally Posted by NJBiker72 View Post
    Depends how much the hike is. To 50%? Plus state and local. Is it worth my time to get that little extra? I don't know. At some point, it is no longer worth it.
    Yep.

    As I mention above...at some point you value your time for some other purpose rather then earning the decreasing marginal amount.

    Opportunity cost - Wikipedia, the free encyclopedia
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  18. #18
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    Quote Originally Posted by chudak View Post
    Yep.

    As I mention above...at some point you value your time for some other purpose rather then earning the decreasing marginal amount.

    Opportunity cost - Wikipedia, the free encyclopedia
    This is also known IIRC as a substitution effect where a person "substitutes" mowing the lawn or going for a hike instead of working a few extra hours because the money earned is valued less than paying someone to mow the lawn or the pleasure of going on the hike. Higher marginal rates act to suppress wealth creation - in the example the person who doesn't work but mows the lawn reduces his wealth and the wealth of the kind down the street who could have used the mowing money.

  19. #19
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    Quote Originally Posted by AM999 View Post
    This is also known IIRC as a substitution effect where a person "substitutes" mowing the lawn or going for a hike instead of working a few extra hours because the money earned is valued less than paying someone to mow the lawn or the pleasure of going on the hike. Higher marginal rates act to suppress wealth creation - in the example the person who doesn't work but mows the lawn reduces his wealth and the wealth of the kind down the street who could have used the mowing money.
    That's the same thing

  20. #20
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    Quote Originally Posted by chudak View Post
    Sure I would. Think about it this way: after working 8 hours in a day I can continue working and only get to keep half of what I make or I can go home and enjoy some time away from work. At some point, the marginal tax increases means that you are making less for the extra effort than you deem the effort worth.
    Instead of "are" there I would say "may be" is a more accurate claim

    Of course, if you have an idea of what you want to purchase(especially if your spending is locked in, at least short term, by contract) you might increase the amount of work you do to have enough money

  21. #21
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    Quote Originally Posted by AM999 View Post
    This is also known IIRC as a substitution effect where a person "substitutes" mowing the lawn or going for a hike instead of working a few extra hours because the money earned is valued less than paying someone to mow the lawn or the pleasure of going on the hike. Higher marginal rates act to suppress wealth creation - in the example the person who doesn't work but mows the lawn reduces his wealth and the wealth of the kind down the street who could have used the mowing money.
    People largely ignore the fact that a person's time is inherently valuable to that person. The question is what will they do with that time?

    For people at a subsistence level, they must use quite a bit of that time to work to meet basic needs. For these people higher taxes don't afford much opportunity to make the decision to work less. Rather, they'd have to work just as hard or harder when facing a 'pay cut' due to an increase in taxation.

    However, the higher income individual is not deciding between eating and paying the rent when they face a tax increase. They are deciding between getting the mercedes S class and the E class. At some point, they value their leisure time more than the marginal income they derive from additional work.

    The higher the tax on the upper end, the less the incentive to work for that marginal gain considering alternative uses of one's limited time.

    I already make this decision; I'm afforded the opportunity to work overtime (at straight time, not time and a half) and I typically decline it because I value my free time more than the additional income I would derive. This decision would be even more likely if I faced confiscatory tax rates on that additional income (work).
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  22. #22
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    Quote Originally Posted by chudak View Post
    Yep.

    As I mention above...at some point you value your time for some other purpose rather then earning the decreasing marginal amount.

    Opportunity cost - Wikipedia, the free encyclopedia
    Another voice of reason. Hard to believe people cant't understand this concept.

  23. #23
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    Quote Originally Posted by chudak View Post
    People largely ignore the fact that a person's time is inherently valuable to that person. The question is what will they do with that time?

    For people at a subsistence level, they must use quite a bit of that time to work to meet basic needs. For these people higher taxes don't afford much opportunity to make the decision to work less. Rather, they'd have to work just as hard or harder when facing a 'pay cut' due to an increase in taxation.

    However, the higher income individual is not deciding between eating and paying the rent when they face a tax increase. They are deciding between getting the mercedes S class and the E class. At some point, they value their leisure time more than the marginal income they derive from additional work.

    The higher the tax on the upper end, the less the incentive to work for that marginal gain considering alternative uses of one's limited time.

    I already make this decision; I'm afforded the opportunity to work overtime (at straight time, not time and a half) and I typically decline it because I value my free time more than the additional income I would derive. This decision would be even more likely if I faced confiscatory tax rates on that additional income (work).
    This is why marginal rates matter when placed on income and even moreso investments. It changes the equation. It is also why only the top marginal rates really matter. They are the "least efficient" in economics terms as they effect those that can most likely change their behavior to suit the change in rewards.

  24. #24
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    The question isn't are you going to work more than you are now to make up the difference in increased taxes. The question is are you going to work less than you do now because you are getting taxed more.

    It must be nice to be making so much money that you are willing to take a pay cut because working at a 39% tax rate "isn't worth it to you".
    I hate you all

    j/k lol kthxbye!

  25. #25
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    Quote Originally Posted by foto View Post
    The question isn't are you going to work more than you are now to make up the difference in increased taxes. The question is are you going to work less than you do now because you are getting taxed more.

    It must be nice to be making so much money that you are willing to take a pay cut because working at a 39% tax rate "isn't worth it to you".
    As I said elsewhere, I just might if I value my time more than the additional marginal income derived from the additional work.

    And, IIRC the OP was discussing the UK where the top marginal rate went from 40% to 50%. Evidence suggests that many people made this exact decision. Whether or not this will be the case in the US when the top rate goes from 35% to 39.6% remains to be seen but evidence suggests that a static analysis won't be correct.

    However, if you really want to see if this is the case why not go all in and implement the 90% top rate I see being suggested by Robert Reich and Paul Krugman?
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