- Laffer curve
- A Laffer curve is a graph of how tax revenue changes as the tax rate rises, from nothing at a zero rate, to a peak, then back down.
- Tax base
- The tax base is the total income, spending or wealth that a tax applies to, and it can shrink when the tax rate rises.
How taxpayers respond to a higher rate
Can you name three ways taxpayers can respond when a tax rate rises?
Each shrinks the tax base, so the higher rate is charged on less income.
Working fewer hours is cutting back on paid work because each extra hour now leaves less income after tax.
Can you think of an example?
A self-employed architect on the top rate turns down weekend work once the rate rises, because she keeps less of each extra pound she earns.
Tax avoidance is bending the rules of the tax system to try to gain a tax advantage that Parliament never intended.
Can you think of an example?
A high earner routes pay through an artificial scheme that serves no purpose except to cut the tax bill, so less income is declared to HMRC.
Leaving the tax base is stopping taxable activity altogether, for example by retiring, not starting a business, or moving abroad.
Can you think of an example?
A surgeon near the end of her career retires early once the top rate rises, so the Treasury collects no income tax on the pay she would have earned.