The Laffer Curve in Action

https://rodgercuddington.substack.com/p/the-laffer-curve-in-action

by freespirt • 7 months ago

10 19 7 months ago

rodgercuddington.substack.com

devnull35• 7 months ago

I had written this on SM sometime back. I realized it is applicable to other nations as well and not just Brits (like French)

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UK's situation is akin to someone who used to be rich and but that wealth has been steadily eroded. But that person still insists on having the same standard of living.

There is a generation of Brits who do not know what true sustained shortage is or what rationing is. They have never experienced blackouts or lawlessness. (What is being experienced right now is just a trailer)

So there are only two options really:

1. Insist on maintaining the standard of living

2. Willfully accept to lower the standard of living

Brits want (1) but the govt doesn't have the money and yet they don't want to pay for it.

This results into govt looking for every opportunity to tax. This results into passionate discussions on whether this is fair or not.

These debates even though understandable at times loses the sight of fact that this is a result of choice (1).

As for taxes, the govt will squeeze anything which resembles a pot of money which was untouched so far. Also the expenses (due to choosing (1)) are going to rise every year.

What will be left for the govt to tax next year or 5 years from now? The govt will run out of things to tax eventually. This is clearly not sustainable.

I think also the law of averages is catching up with Brits i.e. after so many generations (since the colonial era) there will be come a few generations which will be worse off.

__What is the way forward?__

This is not a solution to the problems but to accept the hard reality that there are going to be few generations of people who will have to make peace with a lower standard of living, work hard without getting much in return, so that their grand children will enjoy a much better life.

In other words, the current generation (and maybe next) has to swallow the hard pill.

These sacrifices on families come in multiple forms like:

1. Low wages, increased work hours

2. Prepare to go abroad for work to earn a little extra, just like skilled migrants from less developed countries do.

3. Make the best with what you have

4. Living within means.

5. Become less materialistic

6. Prepared to do work which Brits did not like and passed on to the immigrants

7. Pay for healthcare

8. Substantial reduction in benefit amounts.

9. Everyone in family has to work

(This does not talk about what govt should do, which should be a different post)

freespirt4• 7 months ago

yes very valid and good points,I think much of what you say is now in process.

impossiblefork3• 7 months ago

This is not a solution to the problems but to accept the hard reality that there are going to be few generations of people who will have to make peace with a lower standard of living, work hard without getting much in return, so that their grand children will enjoy a much better life.

The problem is that that often isn't what happens. The one who works hard for little in return, rather than catching up, is behind forever. One works for compensation only.

Accepting low wages isn't a 'sacrifice' that is eventually repaid. A sacrifice rather takes the form of working for high wages while saving.

devnull35• 7 months ago

is behind forever.

This completely depends on the policies of the future govt. There are many examples (like South Korea, China, India) where the current generation is much better off than previous.

Another example is cliched "American Dream". There is/was some element of truth that if you are sincere and ready to work hard you can still make it in the life. However, I will agree that this can become much harder now.

devnull35• 7 months ago

Accepting low wages isn't a 'sacrifice' that is eventually repaid

It is not a question of being eventually repaid. It is to survive to fight another day. There are countless examples of how first generation immigrants (across all ethnicities) have to struggle and sacrifice so that they can provide the foundation for the next generation to thrive.

This is the mode Brits will have to enter into unfortunately.

17186274402• 7 months ago

But when (2) is what "my" country has to offer, why should I stay? This isn't even the typical tax evasion debate, because retirement is also an issue for average Joe. It's not like the other European countries are any better off, but the first country going to defect on this, is going to loose labour to the other countries, which then might even be able to cash in on their promises.

devnull35• 7 months ago

I am not sure I understood but the above is written from average Joe pov.

It's not like the other European countries are any better off

Agree. As I said at the start this is applicable to other rich nations as well like the France.

In short, the UK will go down from 1st world to 2nd world (if one does not like the term: 3rd world).

NoseyParker4• 7 months ago

I hope you do not mind a critique of your generally well-researched article.

1. The non-dom tax was the stupidest tax I've ever heard of. Somehow the owner of the Daily Mail, Lord Rothermere, all sorts seemed to be able to claim non-dominant status, and they were going home shortly to whoever that was. Meanwhile, anyone who moved to the UK from abroad would no doubt have found out on arrival at a low rate that they didn't have to pay tax on their overseas money. They would have shrugged their shoulders, broken into a smile, and moved on.

However far and away the worst part of it was: that person was not subject to UK tax for all of their non-UK investments. Now, only a complete moron would make any UK investments. So their entire contribution was their Mayfair lunch bills and the maids they hired. That had to go, and they (nothing wrong with them individually of course) are no loss.

CGT - it was tomfoolery having it at 10%. Lowest by far amongst industrialised countries (well before the rich stopped having to pay tax at all in US). May as someone lucky enough to start a business and take it to sale, we spoke once about tax on day 1, and then again a year before the end. The idea of embarking on an incredibly ambitious idea, and then handicapping yourself to save 8% on CGT were the millions to come... is what no founders have ever done. Squealing from the hundred millionaires about being $10 million lighter in theory for capital gains. It's a narrow cane was embarrassing. I remember one point out they'd worked on weekends to make this money...

Finally, may I say your examples for international competition are not very fulsome and not very fair. Dubai is a complete red herring of course. Good luck getting that Portuguese visa now. Ireland, you've just picked the one element of their tax code that is lower.

Oh one more. CGT tax rises didn't come in until oct 24, after your 14% decline. Reason they went down is the same reason they always go down - asset prices were down.

freespirt4• 7 months ago

Thank you for taking the time to engage with the article. You raise several points worth addressing:

*On non-dom status:* You’re absolutely right that the old non-dom regime was indefensible as policy. The idea that someone could live in Mayfair for decades, contribute significantly to the UK economy and society, yet structure their affairs to avoid UK tax on worldwide income was indeed absurd. Lord Rothermere is the perfect example of the inequity. My point wasn’t to defend non-doms, but to note that their departure represents a revenue loss - which it objectively does, regardless of whether the previous regime was justifiable.

However, I’d push back on your characterisation that their only contribution was “Mayfair lunch bills and maids.” Many non-doms were significant employers, investors in UK businesses, property owners paying substantial SDLT and council tax, and contributors to UK charities and institutions. The departure of 1,800 people (50% above OBR forecasts) does represent a genuine fiscal impact beyond lunch bills.

*On CGT rates:* Here you’re on shakier ground. You say “it was tomfoolery having it at 10%” and claim this was the “lowest by far amongst industrialised countries.” That’s simply not accurate. Looking at OECD data:

- Switzerland: 0% (cantonal taxes vary but often much lower than UK) - Belgium: 0% on shares - New Zealand: 0% in most cases - Luxembourg: 0% after 6 months - Netherlands: effective rate often under 10% - Germany: 26.4% but only on recent gains

The UK’s 10% rate for BADR was competitive but hardly an outlier. And your claim that “no founders have ever” made decisions based on tax planning simply doesn’t match reality. Talk to any M&A advisor or tax accountant - timing of exits around tax changes is absolutely a consideration for founders and investors. It may not be the primary driver, but it’s certainly a factor in a multi-million pound decision.

*On asset prices explaining the CGT decline:* This is a fair point worth examining. You’re correct that CGT receipts are volatile and correlate with asset prices. However, the OBR itself attributed the shortfall to factors beyond just asset price movements - they specifically noted behavioural responses and structural changes. The 19% decline from £16.9bn to £13.7bn over two years occurred during a period when equity markets were actually relatively stable or rising (FTSE 100 up, property prices mixed but not collapsing). If it were purely asset prices, we’d expect to see similar patterns in other countries with buoyant markets - but we don’t.

*On international competition examples:* You dismiss Dubai as a “complete red herring” but that’s where the wealthy are actually going - 9,800 millionaire inflows projected. Whether you or I like it is irrelevant; it’s happening. On Portugal, yes, they’ve tightened some golden visa rules, but they remain significantly more attractive than the UK for many tax purposes. And on Ireland, I deliberately picked corporation tax because that’s the rate that matters most for business location decisions - which is precisely what we’re discussing.

*The fundamental point:* You can argue about whether individual tax changes were justified on equity grounds (and I’d agree with you on non-doms), but that’s separate from whether they’re producing the revenue forecasted. The OBR’s £7.5bn shortfall is a fact, not opinion. The 50% higher-than-forecast non-dom departures are measurable. The CGT revenue decline is in the data.

Whether these policies are morally right is one question. Whether they’re achieving their fiscal objectives is another. The evidence suggests they’re not - and that’s the Laffer curve dynamic in action, regardless of how we feel about the underlying fairness of previous regimes.

What’s your view on the broader revenue shortfall and the OBR’s structural deficit assessment?

NoseyParker4• 7 months ago

I won't belabour the non-doms point as you concede yourself it was indefensible.

On CGT comps - all those are not straight forward. You can have Switz, NZ, and Bel. You can't have Lux (22% if hold >10%) or Netherlands (the system is mental... - they get their 30% though)

I think the bulging argument against the 19% two year decline is the first of those years you cite was before the labour govt, and before any changes?

amai• 7 months ago

First you need an https://en.wikipedia.org/wiki/Expatriation_tax, only then you can raise taxes for the rich.

The Laffer Curve in Action

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