Sunday March 24, 2019INDEX
Are the tax cheats having a Laugh?

As befits all screwball ideas, the Laffer Curve was first drawn out on a napkin. It's purpose was to convince immensely wealthy men that taxing other very wealthy people, was counter productive.

The napkin in question belonged to an economist called Arthur Laffer who was meeting with two top American officials, Dick Cheney and Donald Rumsfeld, during the administration of President Gerald Ford as long ago as 1974.

Laffer's idea was that under some circumstances tax take actually decreases when tax rates increase. This is because people stop working because they can't earn enough to make it worthwhile, or they leave the country or they get involved in some kind of tax avoidance scheme.

The Laffer curve makes sense under some very extraordinary conditions (i.e. tax rate 100%, tax take=0) but for the most part it remains controversial with economists arguing about what the sweet point (the rate at which tax take can be maximised) might be. Economists like to have arguments like that. It distracts them from the widespread criticism that they aren't much use if they can't spot a huge world depression coming (as very few of them did).

One spin off of this cranky and largely useless theory, is the idea of millionaire tax flight. If you pick up your tabloids often enough you will read about some B list celebrity who is threatening to leave the country because of a fear that tax rates are going to get too high. This is usually accompanied by a chorus of: 'Jolly good thing too. Don't forget to shut the door when you leave.'

Despite the absurdity of each individual case, the drip drip feed of mega rich individuals posing as rats leaving a sinking ship, has an effect on the national psyche: not least making people fear the ship is sinking when it very definitely isn't.

Frequently, place has a great deal to do with how the mega rich make their millions.

As income inequality grows and states consider raising taxes on their wealthiest residents, there is a palpable concern that these high rollers will board their private jets and fly away, taking their wealth with them.

So the first ever very large scale study of migration of the world's richest individuals makes an interesting read. The conclusion of its author Cristobal Young, Assistant Professor of Sociology at Stanford University is in the title of his publication. It's a myth.

Drawing on special access to over 45 million US tax returns, together with Forbes rich lists, he shows that contrary to popular opinion, migration is surprisingly limited. Place still matters, even in today's globalised world.

Of course, the Laffer Curve could still operate when it comes to tax avoidance and plain laziness (the propensity to do less if high tax makes work less worthwhile).

The Myth of Millionaire Tax Flight: How Place Still Matters for the Rich was published in October 2017. You can hear the author interviewed on the BBC's Thinking Allowed broadcast on Radio 4 in October 2018

Posted by Jonathan Brind.
Sunday March 24, 2019INDEX