Then we have political cleansing: Ritchie and Polly can accept the settlement in the South or go to the North. Entrepreneurs in the North can come to the South.

Then we let the experiment begin. We know the result, of course (North vs. South Korea, East vs West Germany). But for the duration of the experiment we have them making trouble only for their fellow travellers and not the rest of us.

People and ants are different – could someone tell RM ?

Oh, and as someone who has been seeking work of any kind at almost any pay, for a year or two now, WHERE are these jobs that yuppie spouses can slide into ? Stupid man.

Alan Douglas

A book in the hands of someone like Richard Murphy is a terrifying thought.

Do you mean “by” 60%, i.e. from 50% to 80%, or “to” 60%, i.e. from 50% to 60%?

We did this with the 50% top rate tax (that increases effective rate to over 60%, once you include National Insurance etc) and established beyond reasonable doubt that it would at best be revenue neutral.

I’d guess his other mistake is to assume that employers will be creating a load more jobs for all these trophy wives, which, in a high tax economy seems unlikely to say the least.

Tim adds: Average tax rate, not marginal. From 34% to 55% is his aim.

just in case he also deletes my subsequent comment, I’ll post it here:

N.B. Alex might be a “real economist” – I see he describes himself as once having lectured at Oxford – but I think he’s made an elementary mistake.

“The Frisch elasticity of labor supply is defined as the percentage change in labor supply resulting from a one percent increase in the expected wage rate, holding the marginal utility of wealth constant. Constant marginal utility of wealth means, for example, that an extra £1 is worth the same to someone with nothing or someone with £10m. You can think for yourself what that assumption might do to an assessment of responses to taxation.”

When you “hold something constant”, that just means you keep it at whatever it is at the point of calculation. So if you are thinking about how somebody earning £10m will respond to an extra £, you take the marginal utility at £10m when making the calc, and if you are thinking about how somebody earning nothing will respond, you take the marginal utility at zero £. This isn’t my area, so I write with some trepidation, but I’m pretty sure that the concept of Frisch elasticity cannot rest on assuming “an extra £1 is worth the same to someone with nothing or someone with £10m” because that’d be absurd and inconsistent with basic neoclassical theory. In general, calculating X holding Y constant absolutely does not mean that Y is a constant. If I’ve got this right, that’s a pretty big mistake for a real economist to be making.

I think he also completely misunderstand the role of assumptions in economic modeling. Showing how the Laffer Curve emerges from the assumptions does not mean “the existence of the curve is thus entirely based on the mathematical extension of these assumptions” it merely show that such simple assumptions give rise of a Laffer Curve. Consider the simplest neoclassical growth model, the Solow model. This shows us that with a few simple assumptions (constant returns, diminishing marginal products etc.) that you cannot account for the observed differences in income across countries by appealing to differences in savings rates. It would be a mistake to say this insight can be discounted because you don’t like the simple assumptions used to generate it.

My initial response is also that he’s also wrong about the bias caused by assuming a closed economy – doesn’t the existence of tax competition and mobility make it more likely that raising taxes will reduce revenues? He seems to be saying the authors are finding Laffer effects because of the closed econ assumption. But I haven’t read the paper so may have muddled his argument.