In the Democratic primary debates so far, we’ve heard all about how great government healthcare is, and paeans of praise for ever higher taxation. Yet little has been offered about how high tax rates can mess up socialized healthcare.
The reality is that the famed economist Art Laffer was right. No, not in all his pronouncements that tax cuts pay for themselves, but in his basic construction of the Laffer Curve itself, he was surely spot on.
The Laffer Curve suggested that at certain high tax rates, people just don’t show up for work, as they’ll go fishing or choose some other activity instead. The latest proof comes from the National Health Service in my native Britain. Tax rates are so high that many senior doctors just aren’t willing to do the work.
This means people are going untreated, and waiting lists grow ever longer. Basically, your cancer treatment will start eventually … that is, potentially within 18 weeks. And 4.3 million people are now on NHS waiting lists for operations. It’s easy to see why.
Britain’s tax structure is complicated, but basically it has a limit on how large you can make your pension pot. If your IRA gets too big, then you have to give back some of the tax breaks. This limit is low enough that doctors hit it toward the end of their career. So, if they do a bit of extra work or work overtime, they pay income tax on the extra income. But their pension pot also goes up, which means another tax bill on top. As many U.K. newspapers are pointing out, this sometimes means absurdly high tax rates. Unsurprisingly, these doctors aren’t going to work, and patient queues are getting longer.
The lesson here is clear. Laffer was right: We can’t have taxes so high that they discourage labor.
And what is that level of discouraging taxation? The best answer we’ve got comes from Nobel Laureate Peter Diamond and fellow economist Emmanuel Saez. Sadly their paper is often woefully misread as saying that this top revenue raising rate is 76%, or maybe 80%. That could, theoretically, be true, but only if we started all over again. This makes absolutely no allowances, no different tax rates for different types of income. This is something we certainly shouldn’t do, as Diamond’s earlier work showed that we really just must have lower taxation rates on capital income. It even showed that dividends, interest and so on, should only pay tax if they’re from monopolies or are economic rents, rather than just the normal return to capital.
In such a system, where we should indeed have those “allowances,” then the top tax rate on income is some 54%. And that’s tax upon income — including Medicaid, Social Security, and everything else that’s a tax on income, not just income tax. Guess what? In a lot of blue states, people are already paying that and sometimes more. So we’re at the peak of the Laffer Curve. Raise taxes any more, and they’re off to the fishing hole, just like those British doctors.
As it happens, I don’t think that socialized medicine is a good idea, having lived under it and watched people die from it. But it’s also true that America already taxes the rich enough that there’s no more to be had from them to pay for it. Tax people too much and they just don’t turn up to work.
Tim Worstall (@worstall) is a contributor to the Washington Examiner‘s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
