Most political pundits and many politicians (of all flavours) describe “supply-side” economics as “voodoo economics” or the ramblings of “delusional supply-side fantasists”. But there's one problem.Whenever we get the stats in, it appears that the rate at which governments tax us actually have an effect on our behaviour, and subsequently on the amount of money that winds its way back to the treasuries.
When the change is small (say an income tax increase from 35% to 37%) there is almost no negative Laffer curve effect. But when the change is large (say a 10% increase or decrease) then this will have a more pronounced effect on government income. This simple economic reality – dynamic scoring – has for a series of bizarre anti-intellectual reasons been ignored and even ridiculed.
Well we've had some more hard data about this economic reality. Aside from this excellent summary from journalist Janet Daley, we've no one seemed to mention this when the data came in around November time.
Gordon Brown raised taxes on the higher earners from 40% to 50%. The effect? Millionaires who were eligible to pay at that rate (based on what they declared to the taxman as income) have – quite within the law, fallen from 16,000 to 6,000. The government has an estimated £7-£9 billion in lost earnings:
It turns out that the introduction of the 50p rate of income tax caused two thirds of those earning over a million pounds per year to simply disappear from the reach of HM Revenue and Customs. Whereas, under the previous highest tax level of 40p in the pound, 16,000 people were prepared to declare earnings of one million, that number shrank to only 6,000 after Gordon Brown, bless him, introduced the higher rate. Result: the Treasury actually lost 7 billion pounds in revenue.
It would appear that due to the worsening economy, and the higher taxation level both incentivising ways of getting around paying income tax at all, and also incentivising entrepreneurs not to bother trying as hard, the government has shot itself in the foot.
That's the funny thing about this supply-side “voodoo economics” that can't possibly be real: it has a tendency to actually be very real indeed.