Optimal tax rate for top one per cent may be as high as 83%

Paper suggests cutting taxes may divert attention to wasteful bargaining

Via Daniel Elton, a new(ish) paper (pdf) by economists Thomas Piketty, Emmanuel Saez and Stefanie Stantcheva makes the case for the optimal tax rate of the richest one per cent could be as high as 83 per cent.

The authors look at three possible ways in which top incomes respond to marginal tax rates.

The first is the "supply side" channel cited by Arthur Laffer when he developed his concept of the Laffer curve. Under this channel, marginal tax rates that are too high result in people doing less work than they otherwise would. Lower tax rates thus respond to more economic activity, and greater growth and higher tax revenue. Laffer's work was used by the Reagan administration to justify cutting the top rate in the US, from 70 per cent down to 28 per cent.

The second is the "tax avoidance" channel. This is the model cited by the Chancellor when he made the decision to cut the tax rate for top earners in Britain from 50 per cent to 45 per cent. The argument is that high tax rates increase tax avoidance, but the authors argue – in common with many of the Chancellors critics – that tax avoidance can be dealt with directly, writing that:

A better policy would be to first close loopholes so as to eliminate most tax avoidance opportunities and only then increase top tax rates.

The third is the "compensation bargaining" channel. The authors argue that:

While standard economic models assume that pay reflects productivity, there are strong reasons to be sceptical, especially at the top of the income distribution where the actual economic contribution of managers working in complex organisations is particularly difficult to measure.

As a result, top workers have ample opportunity to set their own pay, through bargaining harder or influencing compensation committees. The incentives for this economically wasteful activity are higher the lower tax rates are. Just as with the supply side model, tax cuts increase the wealth of the richest in society, but unlike that model they do not also increase growth; rather, the extra money for the rich comes from those poorer than them.

The authors, using their estimates of the elasticity of the various channels (that is, the magnitude of the effect), then calculate what the optimum rates would be. Under the first model, they find it to be roughly 57 per cent – 5 per cent higher than the top British tax rate is until the cut takes effect (National Insurance for top earners is 2per cent). Assessing the second model (Osborne's preferred argument), they find that the optimal tax rate would be 62 per cent, but argue that if the correct anti-avoidance and simplification measures were put in place, it would be 71 per cent.

The third model, however, outputs an optimal rate of 83 per cent. The authors still assume a minor supply-side effect, making up 40 per cent of the total elasticity, which is why it isn't higher. That is, they still assume that high tax rates will encourage the rich to work less, but they also assume that they will encourage the rich to put more of their effort into actual work, and less of it into "compensation bargaining".

How to decide between models one and three (the authors assume that once anti-avoidance measures are put in place, model two is the same as model one)? The former predicts that lower tax leads to more work, the latter that it merely leads to higher pay. As a result, tax cuts should be correlated with higher growth. Are they? Well, no:

As a result, the bargaining model can at least be said to be as realistic as the supply-side model; and if that's the case, the optimal top tax rate for most nations is likely to be far in excess of where it is set now.

For more, see the authors in the Boston Review, VoxEU, or their original paper (pdf).

Pictured: Laffer. No, wait, laughers. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty
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Ann Summers can’t claim to empower women when it is teaming up with Pornhub

This is not about mutual sexual fulfilment, it is about eroticising women’s pain. 

I can’t understand why erotic retailers like Ann Summers have persisted into the twenty-first century. The store claims to be “sexy, daring, provocative and naughty”, and somewhat predictably positions itself as empowering for women. As a feminist of the unfashionable type, I can’t help but be suspicious of any form of sexual liberation that can be bought or sold.

And yet, I’d never really thought of Ann Summers as being particularly threatening to the rights of women, more just a faintly depressing reflection of heteronormativity. This changed when I saw they’d teamed-up with Pornhub. The website is reputedly the largest purveyor of online pornography in the world. Pornhub guidelines state that content flagged as  “illegal, unlawful, harassing, harmful, offensive” will be removed. Nonetheless, the site still contains simulated incest and rape with some of the more easily published film titles including “Exploited Teen Asia” (236 million views) and “How to sexually harass your secretary properly” (10.5 million views.)  With campaigns such as #metoo and #timesup are sweeping social media, it seems bizarre that a high street brand would not consider Pornhub merchandise as toxic.

Society is still bound by taboos: our hyper-sexual society glossy magazines like Teen Vogue offer girls tips on receiving anal sex, while advice on pleasuring women is notably rare. As an unabashed wanker, I find it baffling that in the year that largely female audiences queued to watch Fifty Shades Darker, a survey revealed that 20 per cent of U.S. women have never masturbated. It is an odd truth that in our apparently open society, any criticism of pornography or sexual practices is shut down as illiberal. 

Guardian-reading men who wring their hands about Fair Trade coffee will passionately defend the right to view women being abused on film. Conservative men who make claims about morals and marriage are aroused by images that in any other setting would be considered abuse. Pornography is not only misogynistic, but the tropes and language are often also racist. In what other context would racist slurs and scenarios be acceptable?

I have no doubt that some reading this will be burning to point out that feminist pornography exists. In name of course it does, but then again, Theresa May calls herself a feminist when it suits. Whether you believe feminist pornography is either possible or desirable, it is worth remembering that what is marketed as such comprises a tiny portion of the market. This won’t make me popular, but it is worth remembering feminism is not about celebrating every choice a woman makes – it is about analysing the social context in which choices are made. Furthermore, that some women also watch porn is evidence of how patriarchy shapes our desire, not that pornography is woman-friendly.  

Ann Summers parts the net curtains of nation’s suburban bedrooms and offers a glimpse into our peccadillos and preferences. That a mainstream high street retailer blithely offers guidance on hair-pulling, whipping and clamps, as well as a full range of Pornhub branded products is disturbing. This is not about women’s empowerment or mutual sexual fulfilment, it is about eroticising women’s pain. 

We are living in a world saturated with images of women and girls suffering; to pretend that there is no connection between pornography and the four-in-ten teenage girls who say they have been coerced into sex acts is naive in the extreme. For too long the state claimed that violence in the home was a domestic matter. Women and girls are now facing an epidemic of sexual violence behind bedroom doors and it is not a private matter. We need to ask ourselves which matters more: the sexual rights of men or the human rights of women?