Kezia Dugdale should get to know her Laffer curve

Kezia Dugdale should get to know her Laffer curve

by Eben Wilson
article from Wednesday 18, November, 2015

KEZIA DUGDALE has been honest enough to propose how her anti-austerity spending plans would be paid for. 

That in itself is a welcome change from days before the presence of campaign groups like the TaxPayers' Alliance and TaxpayerScotland; we are forcing politicians to cost their promises. 

What we now want politicians to understand is that continuing to spend more of our money does not lead to the outcomes they suggest. For now, they are stuck in what are called “static scoring” calculations. So they come up with ideas using new tax powers coming to Holyrood reported as:

“The £440m bill would be paid by not increasing the threshold for higher rate income tax and saving £250m by not pursuing the SNP plan to scrap Air Passenger Duty”.

“Freezing the higher rate threshold at £43,000 instead of lifting it to £50,000 by 2020 and so leaving higher-earning Scots £1280 a year worse off than in England.

These static scoring calculations are undoubtedly wrong. They ignore how tax revenues and productive output adjust when taxes are changed – something called “dynamic scoring”. 

Don’t take our word for it, the European Central Bank has a working paper which contains some startling calculations of the effect of raising payroll taxes in Europe. They calculate that the increase in revenue from a dynamic analysis is only 8 per cent of the simple static calculation. Capital taxes (and APD can be seen as a tax on leased aircraft capital income) are worse; they forecast only a 1 per cent gain. 

For non-economists, this may seem a strange outcome, surely if you raise the rate of a tax, you will get more revenue? Actually,nothing can be further from the truth.  It is explained well here by economist Dan Mitchell. You will usually get some additional revenue (although the gain from income tax rates above 50 per cent is minimal at best and possibly negative were mobile Scots to move away), but you also get changes in production intentions and practice. In a very real sense, the state wrecks economic prospects by changing business and individual behaviour. Where tax rates are already high, and in Scotland you need to earn £175 to spend £100, a marginal rate of 58 percent, any additional revenue comes at a great cost to productive output. 

We ignore these Laffer effects at our peril, they literally impoverish the nation through the good intentions of those who will spend some people’s money on other people. Think expensive steel and closed steel plants, think “Linwood no more, Bathgate no more” as the song goes.

Ms Dugdale says “Someone has to pay”. Indeed they do, but who will this be? Sadly, it is much more likely to be less well-off Scots. Why? Because these measures will reduce Scotland’s already lacklustre growth rates, the one thing that really makes struggling families wealthier. 

We need new productive output more than anything else. In fact, the best idea Ms Dugdale has had is letting head teachers run schools instead of councils. It’s a great pity that she proposes higher taxes to fund this – we don’t want an army of school leavers on the streets with no jobs. There are too many of those in Continental Europe already. And why? Well, the same European Bank Report calculates that the revenue returns to higher taxes in Denmark and Sweden are in fact negative. 

There’s a lesson for Scotland in that.

Eben WIlson is director of Taxpayers Scotland, this article appeared previously on his own blog.


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