Monday, 8 August 2011

DOWN TO THE DOCTOR’S: Why Labour should support tax cuts for the rich

_richardmcgrathLibertarianz leader Dr Richard McGrath invites you down to his surgery for an inoculation against this week’s stories and headlines on issues affecting our freedom.
This week: Why Labour should support tax cuts for the rich

DOMPOST: “Inequality report ignores tax cuts for the rich: Goff” - John Key appears to think income inequality is a bad thing. Phil Goff slaps him with a wet bus ticket for not taking into account the cuts to income tax enacted by National since their election in 2008…

This is much ado about nothing, a phony war over a non-issue. Apparently the gap between top and bottom incomes hasn't widened recently. That's probably not a good sign, as it means industrialists and entrepreneurs possibly aren't making bigger profits, and therefore are less likely to employ more people.

It's no secret that Labour and Bill English like the idea of a capital gains tax. Labour also wants to reinstate the Cullen Envy Tax (i.e. raise the top tax rate back to 39%). But why would on earth would Goff want to decrease government revenue? Doesn't he realise that hiking income tax rates leads to less, not more, tax taken by govt?

Daniel Hannan, member of the European Parliament, points out in his blog that in order to make the rich pay more, governments should tax them less. He links to an interesting article by the Adam Smith Institute (whose publications I strongly recommend) that quotes example after example of how tax reductions for the wealthy encourages them to stick around, keep making profits and thus fall prey to tax collectors.

Even that darling of statists everywhere, John Maynard Keynes, stated: "[T]axation may be so high as to defeat its object, [and] a reduction of taxation will run a better chance than an increase of balancing the budget."

Don’t believe me? Here’s some examples:

  • UK, 1979: Chancellor Geoffrey Howe cuts marginal tax rate from 83% (!) to 60%. Before the cuts, the top 1% of taxpayers were paying 11% of total income tax received. Nine years later, despite the hefty cuts, they were paying 14% of total income tax.
  • UK, 1980s: Chancellor Nigel Lawson cuts marginal rate further, to 40%. By 1997, the top 1% of taxpayers are paying 21% of income tax received. Thus halving the marginal tax rate doubled the income tax receipts from the wealthiest 1%.
  • US, 1920s: Presidents Coolidge and Harding reduced the top tax rate from 73% to 25%. The share of tax paid by earners making over $100,000 nearly doubled between 1921 and 1925, from 28% to 51%.
  • US, 1961: The top tax rate under Eisenhower had crept up to a staggering 91%. The Democrats supported by Kennedy dropped this to 70%. He stated, a few months before a sniper removed the occipital lobes of his cerebral hemispheres: "[T]ax rates are too high today and tax revenues are too low, and the soundest way to riase revenues in the long run is to cut the tax rates..." As a result of the Kennedy tax cuts, those earning over $50,000 increased the amount of tax paid by 40%, and paid 15% of income tax received in 1966, as opposed to 12% in 1963. Total income tax received went up from $69b in 1964 to $96b in 1968.
  • US, 1981: Under President Reagan, Congress reduced the top tax rate from 70% to 50%. Between 1981 and 1988 the top 1% of tax earners increased their share of tax received from 18 to 28%, while the bottom 50% of taxpayers decreased their contribution to income tax received from 7.5% to 5.7% over this same period.
  • US, 1991: George H W Bush, elected on a platform of "no new taxes", supported the introduction of new taxes including raising the top tax rate from 21 to 31%. The net result was that the wealthiest Americans paid $6.5b less in 1991 than they had the previous year before the tax was introduced. Federal tax results as a proportion of GDP dropped too.  
  • US, 2003: George W Bush reduced the top tax rate from nearly 40% to 35%. Between 2004 and 2007 federal tax receipts increased by $785b, mainly from the wealthy.
  • In 2000, the top 60% of US taxpayers paid all the income tax. The bottom 40% paid no net tax.
  • Canada, 1990: Top federal tax rate cut from 45% to 29%; share of tax paid by top 10% of taxpayers increases from 29% to 45%.
  • France, 1996: Gradual decrease in top income tax rate from 48% to 40%; result: higher tax receipts.
  • Hong Kong: Low flat income tax rate of 16% (or choice of graduated rates up to 17% maximum). Result: purchasing power parity 7th highest in the world and closing in on the US.
  • India, 1985: Top tax rate reduced from 65% to 50%; tax revenue the following year rises by 20%.
  • India, 1997: Tax rates reduced across the board; result: no drop in revenues but increase in number of taxpayers over following year, with rise in tax revenue over following 6 years and 50% increase in compliance.
  • Russia, 2001: Flat tax of 13% introduced. Result: 25% increase in personal income tax receipts the following year.

So, Mr Goff:

There is ample evidence that decreasing the top tax rates increases government revenue. So why are you advocating a rise in the marginal tax rate?

Are you so consumed by hatred of the successful for being successful that you would incur a drop in government revenues in order to drive these people offshore, which, of course, is what the wealthy do when grasping parasites like you try to steal larger amounts of their income than they are willing to hand over for redistribution?

Pray tell, Mr Goff.

See y'all next week!
Doc McGrath


  1. Lindsay Mitchell pointed out a couple of months ago that Goff and his mates in parliament are "rich pricks". So Goof is deriding himself.

  2. Sean Fitzpatrick9 Aug 2011, 07:44:00

    It should be emphasized that this increase is in the PROPORTION of the total tax take that the top earners pay - the total amount of tax taken in by the state would most likely be less thus in part accounting for the on -balance higher proportion.

  3. Hal Incandenza9 Aug 2011, 20:09:00

    Oh well, reduce tax rates to zero and watch the revenue flow! You'd hate that though, so maybe tax rates should be increased further to limit the size of the state.

  4. You seem to think Labour has some connection to rational economic thought. It is apparent that it appeals to jealousy and laziness rather than serious economic principle. Jeff W

  5. Richard McGrath16 Aug 2011, 15:43:00


    I think you would find revenue vs tax rates was a bell shaped curve with an optimum level of taxation which would maximise revenue.

    However if the size of the state was reduced along with tax rates, the latter could be reduced well below that optimum revenue level.



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