During the late 1970s the U.K.’s top income tax rates were over 80%, and yet the top 5% of income taxpayers contributed just 24% of the total, whereas nowadays at much lower tax rates this group pays around 43% of the total; the top 10% paid 57.6% in 2011/12. The top 1% paid 11% of the total in the 70s; and 27.7% in 2011/12 (up from 21.3% in 1999/2000) – raising £44 billion, more than raised from companies. Apart from showing that the wealthy pay a disproportionate amount of taxes, the figures clearly imply that lower tax rates actually increase tax revenues. This counter-intuitive observation seems to support the Laffer Curve theory, which sees two counteracting effects at play in the raising of tax revenue: that of ‘arithmetic’ accumulation and the ‘economic’ consequences. The arithmetic effect is straightforward: revenue collected is the tax rate multiplied by tax-base (the taxable amount available) accumulated across the various bands. The economic effect is the recognition that the tax rates imposed will have a dampening effect on the tax-base – a higher tax rate will trigger tax evasion, more effort in avoidance, less incentive to earn, more time spent at leisure, and some tax-payers permanently leaving the jurisdiction.

At the extreme a 100% tax would mean no incentive at all; no one would bother to work since all the fruits of their labour would all be taken off them. Hence the economic effect of a total tax would mean an empty tax-base, and a consequential tax take of zero. Charging tax at 0% would also bring in nothing. Hence there must be an optimum tax level that maximizes the tax take balancing these two effects. But what level? This is an impossibly complicated calculation that would also have to take into account special circumstances (like paying for a war, or subsiding the unearned bonuses of the banking sector), or the availability of offshore tax havens, or changes in the overall economic climate etc. Nevertheless it seems clear that punitive tax levels actually drive down revenue.

Why is it that the taxman focuses on the arithmetic consequences, but has no conception of economic ones? Does he believe in a kind of Newton’s Law of Taxation: where to every action (that is tax) there is an equal and opposite reaction (namely everybody pays up in full)? According to their simplistic arithmetic logic, tax creates a revenue stream, and a higher tax makes for a larger stream. Not in Laffer’s non-linear world of consequences. The only law the Revenue should consider is that of Diminishing Returns. Taxing is disturbing. There is an uncertainty principle at play here. The act of taxing disturbs and changes the attitude of both the persons being taxed, and those doing the taxing. Those profiting from taxes get an appetite for it, and like Oliver Twist will ask for more. However, keep increasing tax levels, and the tax-base collapses. And when the tax-base collapses, so does the economy, and ultimately so does the country. Death by taxes – a lesson that every socialist state eventually learns. One that President Hollande’s France will learn very soon. The rate of tax needn’t even be that high – the mere introduction of a new tax is interpreted as a statement of intent, a signal of more to come.

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