Tuesday, January 22, 2013

Adventures Near the Inflection Point of the Laffer Curve

. Tuesday, January 22, 2013

First, France: Gerard Depardieu has left the country to avoid paying the new top marginal tax rate of 75%. He's apparently moved to Belgium for now, but Putin has given him a Russian passport and an offer of citizenship just in case he develops a taste for little water.

Second, France again: Nicholas Sarkozy and Carla Bruni are considering doing the same thing, perhaps by moving to London. In a first-as-tragedy-then-as-farce moment, David Cameron is actively recruiting tax exiles. (Remember that in the not-so-distant past tax exiles were leaving Britain for France, among other locales. Here's a 1977 op-ed talking about the phenomenon among musicians. The Rolling Stones wrote and recorded Exile on Main Street as tax refugees. Others included Ringo Starr, Peter Sellers, Sean Connery, and many more. Here's a slideshow of some notable examples.)

Third, California: Phil Mickelson has said that he may leave the state as a result of significant income tax increases at the state and national levels. California's income tax rate is 13.3% for top earners; Texas and Florida don't have a state income tax at all. Mickelson makes upwards of $40mn/year, so moving from CA to FL could net him $5-6mn/year, if he could save the whole 13.3%. In total, Mickelson claims he'll be losing 62-63% of his income to various taxes.

Note that Piketty and Saez estimated the "optimal" top marginal tax rate -- where "optimal" in this case means maximizing public revenue while minimizing income inequality -- as something like 75-80%. (Although it should be noted that this conclusion is based on an assumption that is less likely to hold in Europe as it is in the U.S.) In other words, that's the approximate point where the slope of the Laffer Curve zeroes out and then turns negative. In this case, the anecdotes roughly correspond to the theory: the margin seems to lie at around a 65-75% top tax rate, which can be sustained before avoidance starts becoming widespread.

As a closing aside, in the U.S. state income taxes can be deducted from federal income taxes. As I understand it, there is no limit to the amount of these deductions. This raises an interesting political question: why don't states set their income taxes at exactly the same levels as federal income taxes? Their tax-paying citizens would be no worse off -- they'd pay the same amount of tax, deducting from their federal bill what they pay to their state -- while the state's finances would be significantly better off. The federal government's budget balance would take a hit, but why should state legislatures care about that? Obviously some complications would arise, e.g. everyone would need to itemize deductions, but it seems like these could be fairly easily managed.

Or maybe not. I'm no accountant or lawyer, so its possible that this is completely wrong. But if it isn't why hasn't anybody tried it?


Ben said...

I'm not an accountant either, but doesn't deducting reduce taxable income rather than tax liability? So, a 40% state rate and 40% federal rate on $100 leads to $40 of state tax and $24 of federal tax, not $40 of state tax and $0 of federal tax. Taxpayers always pay more when either rate increases, regardless of the other rate.

Kindred Winecoff said...

Ben, that sounds about right. Thanks!

Adventures Near the Inflection Point of the Laffer Curve

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