How Gloriously, Amazingly, Ignorant This Is

It would be remarkably so if it weren't from @RichardJMurphy

Professor Richard Murphy just given us the workings of his galactic sized brain:

Colin did, inadvertently, provide an obvious definition of the divide between having sufficient income to live on, and having that level of income which supports the accumulation of wealth.

If those with sufficient, or less, income suffer a reduction in their take-home pay then their obvious reaction is to increase their work effort to recover the sum lost, or their absolute standard of living will decline, potentially at very real actual cost to the wellbeing of themselves and their families.

In contrast, a person with sufficient income to sustain their wealth can respond to a reduction in their income if it is, for example, caused by an increase in their tax rate by then voluntarily reducing their work effort, creating a further potential reduction in their wellbeing over and above that already created by the tax increase. In other words, they can afford to choose to reduce their financial well-being without actually prejudicing the ability of themselves or their family to meet their needs. As a consequence, it follows that they must have income in excess of that required to meet need. That provides a clear indication that they have income that supports their increase in wealth, and not their current requirements.

Of course the point at which this occurs will vary between people, but the fact that this divide so obviously exists and that those who have income that supports wealth are unaware of the fact, is in itself interesting, and a potential basis for policy creation.

The painful thing is that he's right here. That is a useful line of thought. It even leads to interesting policy creations.

It's also the distinction between the income effect (I work to pay my nut then I'm off fishing) and the substitution effect (I look at the value I gain for my work and if it's less than fishing then I'm off fishing). And we do generally think that lower income people - especially those on piecework, like taxi drivers (there are real academic papers on this) - are more subject to the income effect than higher income people who are more subject to the substitution effect.

Very few are wholly driven by either, near all of us a bit by each some of the time and the preponderance is lower income income, higher income substitution.

The thing is, not only do we know all of this - which is why we've got these names for it already - it's also the basis of the Laffer Curve and the Laffer Effect. When does substitution dominate as the effect so that higher tax rates actually reduce tax revenue? And yes, we do all agree that for those subject to the income effect higher taxes can increase labour supply.

Which gives us a perfect example of the problem with Spud's economics. He's advancing into the subject at the speed of his own intellect. Which means that he's 66 before he gets to income and substitution effects. Others, who bothered to go to their economics classes at university, got there some decades earlier.

Further, those who did not do it all by the impulses of their own galactic sized intellect have had it pointed out to them that this is the basis of the Laffer Curve, Laffer Effect.

And, yes, this then does spill over into policy design. Back a couple of decades Spud did the budget submission for the TUC. In which he suggested that a significant increase in income tax on the higher paid would increase labour supply. For the wives of those rich bastards would all go out to work to maintain income and living standards. Which is, of course, entirely the wrong way around. Married women - especially those with children - in the higher income groups are vastly more subject to the substitution effect than they are to the income effect. As those who attended their classes know.

And the glory of @RichardJMurphy's economics is that even though he's now got there, after decades of thinking, he's still not grasped the policy implication of the finding. If you want taxes - say, to reduce the inflationary effects of money printing a la MMT - to actually collect revenue then you've got to tax the poorer, not the richer. Because the poorer will work longer at the new pay rates in order that they may go fishing. The richer will just stop working so much in the face of the higher tax rates and go fishing anyway.

Going to your economics lectures is useful, eh?