Daily Telegraph: Arthur Laffer - still ahead of the curve, the man with a simple tax plan

Szu Ping Chan discusses Professor Art Laffer’s monumental contribution to supply side economics and his argument that high taxes stifle growth – a view which shaped US and UK monetarism policies under Reagan and Thatcher, Saturday 14 June 2014. 

To read the full article, visit the Daily Telegraph website

“Laffer said higher tax rates produced diminishing returns after a certain point because onerous rates discouraged people to work. Using this principle, Laffer argued that in some cases, cutting taxes could actually raise more revenues. With this, the “Laffer Curve”, influenced by John Maynard Keynes and 14th century philosopher Ibn Khaldun, was born.

To this day, Laffer does not fully recall the events of that evening – but more of that later. The American economist, who will be in London this week for the Margaret Thatcher Conference on Liberty, has fond memories of the former prime minister. The Iron Lady famously slashed the top rate of tax, which was 83pc when she came to power in 1979 to 40pc by 1988. Increasing VAT from 8pc to 15pc helped to fund a reduction in the basic rate of tax to 25pc, from 33pc.

Controversial though it was, Thatcher’s successors left the top rate at 40p until 2010, when the Labour Government introduced a new 50p rate on all income above £150,000. The Coalition has since reduced this to 45p but Laffer argues the Government should abolish it altogether.

“It’s already done long-term damage having it at 45p rather than 40p,” he says.

Laffer claims that if the Government scrapped the top rate and “levelled the playing field” at the top it would entice more people to work here, generating more income for the Exchequer.

“If you lowered the tax to 40p, your prosperity would come back, your revenues, your budgets would come back and you would get back what you had. And if you lowered it even further, Britain would even do a better job.”

Official estimates show that reducing the top rate of tax to 45p cost the Exchequer just £100m but there is a more important point.

According to the Institute for Fiscal Studies, the 1pc of taxpayers earning in excess of £150,000 now pay between 25pc and 30pc of all income tax, up from 21pc a decade ago. Tinkering with the way this group are taxed carries a risk for any chancellor.

Laffer’s solution is simple: introduce a flat tax that would bundle together income tax and national insurance, get rid of tax credits and the “absolutely offensive” inheritance tax.

According to Laffer, a flat tax would discourage “gaming” of the system, level out the playing field and ultimately generate more revenues.

“Taxes change all sorts of incentives, and that’s why you want to have a tax system that allows for the least gaming of the tax code,” he says.

“Taxes should be there to collect revenues. If you’ve got poor people whom you want to help, don’t play around with taxes. You can’t help poor people with taxes but you can spend money on them. “Under a flat tax, everyone pays the same rate so there’s not an incentive for tax dodgers and loophole seekers and lawyers and favour grabbers and consultants and deferred income specialists and accountants. Let them all get real jobs!”‘

To read the full article, visit the Daily Telegraph website

Date Added: Saturday 14th June 2014