Laffer curve, gdp and the rental value of land

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Laffer curve, gdp and the rental value of land

  1. 1. The Laffer Curve, GDP and the rental value of land © gmwadsworth@gmail.com
  2. 2. What shape is the Laffer Curve? • The free-market conservatives insist that the revenue-maximising income tax rate is about 35% - 40%. • The left-wingers, to the extent they admit it even exists, insist that the revenue-maximising income tax rate is about 80%. • The most reliable way of estimating the revenue-maximising income tax is to consider the price elasticity of the supply of labour. 2(c) gmwadsworth@gmail.com
  3. 3. What shape is the Laffer Curve? • Estimates for the the price elasticity of the supply of labour, in a closed economy are between 0.1 (i.e. for a ten per cent increase in wages, the increase in hours worked is 0.1 x ten per cent = one per cent) and 0.5 • I have assumed an overall price elasticity of 0.4, i.e. 0.3 plus an additional 0.1 because the UK is not a closed economy (a relatively low income tax rate attracts business from abroad). • The resulting Laffer Curve is shown on the next slide. 3(c) gmwadsworth@gmail.com
  4. 4. The Laffer Curve (assuming labour supply elasticity of 0.4) 4(c) gmwadsworth@gmail.com
  5. 5. But what’s the ‘other half’ of The Laffer Curve? • The main reasons why tax revenues fall when income tax rates are above a certain rate (whatever that rate may be) are: • People will evade or avoid taxes • Most importantly, people will be unwilling to work or start a business for such low net wages or profits, and so will remain unemployed or go abroad (and foreign workers or businesses will not come to the UK). 5(c) gmwadsworth@gmail.com
  6. 6. But what’s the ‘other half’ of The Laffer Curve? • All taxes on output (VAT), labour (income tax and National Insurance), incomes or profits (income and corporation tax), hereafter referred to collectively as ‘income tax’ depress GDP. • The revenue-maximising tax rate (which may indeed be as high as 65% - 70%) is an irrelevance, as the reduction in GDP can be as much again as the tax raised. • Assuming labour-elasticity of 0.4%, the impact of different income tax rates on GDP is shown on the next slide. 6(c) gmwadsworth@gmail.com
  7. 7. Impact of income taxes on GDP 7(c) gmwadsworth@gmail.com
  8. 8. Impact of income taxes on GDP • The average marginal income tax rate is about 50% (taking into account income tax, National Insurance, VAT and corporation tax). • UK GDP is currently just over £1,400 billion. • The previous slide shows that if we were to reduce income tax to zero per cent, GDP would increase to around £1,900 billion. 8(c) gmwadsworth@gmail.com
  9. 9. Impact of GDP on employment • Increases in GDP would benefit employees and potential employees in two ways. • Employment levels would rise from 32 million (as at present) to about 40 million, and/or • Average employment income (total employment income divided by all adults capable of working) would increase from £21,000 (as at present) to £27,000. • The following two slides illustrate this. 9(c) gmwadsworth@gmail.com
  10. 10. Impact of income tax on employment 10(c) gmwadsworth@gmail.com
  11. 11. Impact of income tax on employment 11(c) gmwadsworth@gmail.com
  12. 12. GDP and the rental value of land • It’s fair to assume that people are willing and able to pay higher rents or mortgages in areas with higher employment levels and higher wages. • It’s fair to assume that businesses are willing and able to pay higher rents or mortgages in areas where people have higher incomes and in countries with lower income tax rates • The following slide shows the impact on the total rental value of land in the UK if we scrapped income tax and GDP were to increase as expected. 12(c) gmwadsworth@gmail.com
  13. 13. GDP and the rental value of land 13(c) gmwadsworth@gmail.com
  14. 14. GDP and the rental value of land • Total land rents in the UK are currently about £160 billion (£2,000 billion market selling value, excluding buildings and improvements x 4% yield; plus Council Tax, Business Rates, Stamp Duty Land Tax £60 billion; plus £20 billion interest margin earned by the banks on mortgages on land). • This is used as the starting point (where the income tax rate is 50% and GDP is £1,400 billion). • The blue line increases to the left, in line with likely increases in GDP. (c) gmwadsworth@gmail.com 14
  15. 15. GDP and the rental value of land • “That’s a heroic assumption”, the crowd shouts, “You appear to assume that land rents would increase by £1 for every £1 increase in GDP!” • This is in fact the most reasonable assumption that we can make. Let us ignore GDP and focus on average earnings per adult capable of working. • The following slide is similar to the previous one and shows the predicted average employment income per adult capable of work and the land rental value generated by each employee. (c) gmwadsworth@gmail.com 15
  16. 16. Employment income and the rental value of land (predicted) (c) gmwadsworth@gmail.com 16
  17. 17. Employment income and the rental value of land (predicted) • Average employment income was calculated by multiplying, for each region of the UK, male full time salaries from ASHE multiplied by the employment rates from the Labour Force Survey. • The overall average (£21,000) is then the average of the resulting figure for each region. • The following slide is a scatter graph of average house prices in each region of the UK, from the BBC, plotted against average employment income (calculated as before). (c) gmwadsworth@gmail.com 17
  18. 18. Employment income and the rental value of land (actual) (c) gmwadsworth@gmail.com 18
  19. 19. Employment income and the rental value of land (actual) (c) gmwadsworth@gmail.com 19 • The correlation between average house price and average employment income in each region is 0.915, so it is not perfect correlation, but very high. • The average house price can be converted to a rental value by deducting £100,000 for the cost/value of the building itself and all improvements (roads, street lights, drainage, utilities etc) and multiplying by a 4% assumed return. • Average employment income per household is after 31% income tax and NIC, multiplied by 1.5 adults per household. This was then be plotted against a notional income tax rate for each region (so as to use the same X-axis in the previous chart but one) and average rental values were plotted underneath on the following slide.
  20. 20. Employment income and the rental value of land (actual) (c) gmwadsworth@gmail.com 20
  21. 21. GDP and the rental value of land (c) gmwadsworth@gmail.com 21 • To summarise, it is fair to assume that in the absence of any taxes on output, labour, incomes or profits, UK GDP would increase by about £500 billion per annum. • It is also fair to assume that the rental value of land in the UK would increase by about £500 billion to well over £600 billion per annum. • There are two tiny little problems here…
  22. 22. Two tiny little problems… • The government would have very little in tax revenues, so there would be just enough money for law & order and defence, but none for old age pensions, ‘free’ healthcare or education, or welfare payments. • Bare land values would treble, in line with higher rental values, and so the selling price of land and buildings would more than double. Although people’s net employment income would nearly double, future generations would find it even harder to become owner-occupiers. (c) gmwadsworth@gmail.com 22
  23. 23. One simple solution… • We have seen that income taxes not only reduce the net income of employees and businesses, they reduce GDP quite significantly as well. • Taxes on the rental value of land have no such ‘dead weight costs’. The rental value of a plot of land is dictated by a million and one factors, hardly any of which are under the control of the actual occupier. • If income tax were scrapped (an average marginal rate of 50%), the rental value of land would increase to £600 billion. A 50% tax on the annual rental value of land would raise about £300 billion per annum, quite sufficient to replace all income taxes, as well as Council Tax, Business Rates and Stamp Duty Land Tax etc, assuming sensible reductions in government spending. (c) gmwadsworth@gmail.com 23
  24. 24. One simple solution… • It may be that the rental value of land in the UK ‘only’ doubles to £320 billion, in which case the tax on land rental values would be closer to 100%. • It may be that the rental value of land would increase to more than £600 billion (depending on emigration, immigration, inward investment etc), in which case a tax of £300 billion would be less than 50%. (c) gmwadsworth@gmail.com 24
  25. 25. One simple solution… • If this were the case, total revenues could be increased to £400 billion or £500 billion and the ‘extra’ used to repay the accrued national debt over less than ten years. • Either way, it is a fairly safe bet that the UK government could finance itself entirely with taxes on the rental value of land (plus duties on certain goods, such as petrol, alcohol and tobacco; and a tax on the banks’ rental income, being the 2% interest rate spread that they can earn more or less in their sleep). (c) gmwadsworth@gmail.com 25

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