Two quotes from this blog:

More than a half – or 56pc – of all income tax is paid by people earning over £50,000 a year, who make up 10pc of taxpayers.

Suppose that once a month, ten men go out for beer and the bill for all of them comes to £100. If they paid their bill the way we pay our taxes, it would go something like this;
The first four men – the poorest – would pay nothing. The fifth would pay £1. The sixth would pay £3. The seventh would pay £7. The eighth would pay £12. The ninth would pay £18. And the tenth man – the richest – would pay £59.
So, that’s what they did until the bar owner gave them a loyalty discount, cutting the  cost of their drinks to £80.
The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free but what about the other six men; the paying customers? How could they divide the £20 windfall so that everyone would get his fair share?
They realised that £20 divided by six is £3.33 but if they subtracted that from everybody’s share then not only would the first four men still be drinking for free but the fifth and sixth man would each end up being paid to drink his beer.
So the bar owner suggested a different system. The fifth man, like the first four, now paid nothing. The sixth man paid £2 instead of £3. The seventh paid £5 instead of £7. The eighth paid £9 instead of £12. The ninth paid £14 instead of £18. And the tenth man now paid £49 instead of £59. Each of the last six was better off than before with the first four continuing to drink for free.
But, once outside the bar, the men began to compare their savings. “I only got £1 out of the £20 saving,” said the sixth man. He pointed to the tenth man, “He got £10!”
“Yes, that’s right,” exclaimed the fifth man. “I only saved a £1 too. It’s unfair that he got ten times more benefit than me!”
“That’s true!” shouted the seventh man. “Why should he get £10 back, when I only got £2? The rich get all the breaks!”
“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new system exploits the poor!”
So, the nine men surrounded the tenth and beat him up. Funnily enough, the next month the tenth man didn’t show up for drinks, so the nine sat down and had their beers without him.
But when it came to pay for their drinks, they discovered something important – they didn’t have enough money between all of them to pay for even half the bill.

The Laffer Curve

The curve in this instance is the theoretical curve on a graph. Specifically, a graph that has an x-axis that represents the income tax rate in percent and a y-axis that represents the revenue generated for each possible tax rate. Initially one might expect the graph to be a straight line. Clearly the tax revenue from a 0% tax rate is 0. As the tax rate increases the tax revenue increases until all the income is received as tax thus the graph might look something like this:

However, a moments thought shows that this is not going to be the case. If you are going to be taxed at 100% of your income then you would not bother to work, why would you? You can sit at home doing nothing and be no worse off than working 40 hours a week. We can conclude therefore that the revenue generated from a 100% tax rate would be nothing. This means that we know four things about our graph.

• It must start at the point (0, 0) since a tax rate of 0% generates no revenue.
• It must pass through the point (100, 0) since, as has been discussed, a 100% tax rate generates no revenue.
• It must lie above the x-axis since We know from our own experience that a 20% tax rate raises something.
• It never goes below the x-axis since the lowest revenue that can be generated is zero.

These four facts mean that we can confidently conclude that the curve looks like this:

Given that the curve is as shown then we can further conclude that there is a point at which the revenue is maximised. In practical terms this is the point at which people decide that there is no point in working overtime or the effort of a partner working full-time isn't worth the income. This is the region where people start to decide that trading on the black market is worth the risk of being caught, the point at which dealing in cash becomes the norm.


This, then, is what is known as the Laffer curve. Unfortunately, the one potentially useful fact that we cannot glean form this theoretical curve is at which value the tax revenue starts to fall. Note then this news article which quotes the Institute for Fiscal Studies who estimate that the 50p tax rate is costing £500 million per year as opposed to the Treasury estimate of an income of £2,700 million per year. By 'costing' they mean that overall tax revenue is down which means that this tax raising revenue has made the country worse off. Let me repeat that, we are worse off. How rubbish must our tax collection service be that it cannot identify this decrease? Or, assuming our leaders were well aware that this would not increase the tax take, is it possible to believe that this tax rate was introduced for any reason other than to satisfy the politics of envy?

Your Money or Your Life

You may well be aware that at the moment letters from HMRC are being sent out to individuals who have paid too much or too little tax through the PAYE system. As far as I can ascertain this is because the individuals were given the wrong tax code, whatever the reason, it seems to be universally agreed that the root cause is due to HMRC.
Imagine my surprise then when I heard that HMRC are proposing that we move to a system where your employer pays your gross salary to them, they make the tax deductions and then put the net amount in your bank account. The details are in this consultation document. What made me laugh when I read it, was the first line of paragraph 5.13 which read

“HMRC would be responsible for ensuring deductions were correct”.