The Laffer Curve really does exist - no, really!
That there’s a tax rate too high to maximise tax revenue seems like a reasonable enough statement. That there’s one that is too low to maximise revenue is an obvious one. The Laffer Curve is merely the insistence that both of those things are true. That there’s an optimal tax rate to maximise revenue collection. That is also all that it says.
However, we do need to be careful here. For the Laffer peak is going to be different in different societies, with different tax rules. Further, it’s going to be different for each different tax in each such different society. The rate for a transactions tax will be very low indeed - that 0.01% on financial market transactions was, even by the calculations of those who proposed it in the EU, above that revenue maximising rate. It’s long been said that stamp duty on share purchases is above the revenue maximising rate. Wealth tax rates might well not be quite the revenue enhancer that many seem to think they will be:
A record number of super-rich Norwegians are abandoning Norway for low-tax countries after the centre-left government increased wealth taxes to 1.1%.
More than 30 Norwegian billionaires and multimillionaires left Norway in 2022, according to research by the newspaper Dagens Naeringsliv. This was more than the total number of super-rich people who left the country during the previous 13 years, it added. Even more super-rich individuals are expected to leave this year because of the increase in wealth tax in November, costing the government tens of millions lost tax receipts.
We’re not about to try and calculate whether that is in fact revenue losing but we would like to just point to it as being one of those interesting questions.
His move to Switzerland follows a relatively small increase in tax aimed at the country’s super-rich, who face wealth taxes at both the local and state level. That includes a municipal tax of 0.7% on assets in excess of NOK 1.7m for individuals, or NOK 3.4m for couples. There is also a state wealth tax rate of 0.3% on assets above NOK 1.7m. In November, the government raised the state rate to 0.4% for assets above NOK 20m for individuals, and NOK 40m couples, taking the maximum wealth tax rate to 1.1%.
A 1.1% tax on billionaires’ wealth isn’t, in fact, going to make much difference to total tax revenue. And we are at least arguably seeing that 1.1% is above the revenue maximising rate for such a tax. Or, another way to put this, wealth taxation isn’t quite the Deus ex Machina of the welfare state that some are claiming it is. The amounts to be raised aren’t worth the behaviour change they engender.
Of course, there is also that new new left idea. That it’s the inequality itself which is the problem and that methods of reducing the inequality, in and of itself, make the world a better place. So, people leaving Norway with their wealth makes Norway a better place. At which point no doubt the new new left will be able to show us some improvements in Norwegian society worth the tax revenue being given up. No doubt - they’ll be queuing up to do so, right? Along with the manner in which Switzerland is getting worse as the rich people go there.
Ourselves we think the inequality is in itself the evil argument is insane. Or, to be milder about it, not backed up by any empirical evidence. But that’s not in fact the hurdle that needs to be crossed here. Rather, is the reduction in inequality worth the loss in tax revenue from the exodus? We look forward to any explanations of why that might be true - not that we’d believe them but we do look forward to people trying to make that case.