If nothing else, economists are good at naming things. Malthusianism, Abenomics or, my personal favourite, Baumol's cost disease. But for policymakers, the most important theory is perhaps the Laffer curve, named after the American economist Arthur Laffer, who argued there is a theoretical tax rate at which maximum revenue is achieved.
This makes intuitive sense. Clearly, a tax rate of nil would yield no income. Nor would a rate of 100 per cent, because people would have no incentive to work. It is where the prophesised sweet spot lies that remains contentious and highly political.
Laffer himself was a member of Ronald Reagan's Economic Policy Advisory Board, and his theory was used by conservatives to argue that, in certain circumstances, governments could simultaneously cut taxes and raise revenue. Of course, it is rarely that simple. I mean, just look at that budget deficit.
I mention this because The Guardian has reported that Treasury officials have warned Labour that its plan to close tax loopholes on non-doms – that is, wealthy individuals whose permanent home for tax purposes is outside of the country – may not raise any money. How could that be?
The Office for Budget Responsibility had initially predicted the change would raise around £3.2bn each year, but admitted this was "highly uncertain" as the wealthy could either leave the UK or find ways to get around new tax rules. Awkwardly, Labour has already allocated £1bn to be used for school breakfast clubs as well as more hospital and dental appointments.
Now, tax policy does not necessarily have to be focused on maximising revenues. Political parties of all stripes leverage the tax system to help favoured cohorts or to send political messages. Labour may be disappointed to miss out on a given tax yield, but it may still like the signal it sends to middle-income voters fed up with frozen tax thresholds and crumbling public services.
But there are risks. Speaking to LBC today, former Bank of England Chief Economist Andy Haldane warned of the impact such a policy would have on the UK's global attractiveness. Haldane posed the following:
"What is that doing to sentiment about UK PLC? Does it make it more or less likely people park their money, set up their business here, and therefore generate growth". In answering his own question, he said: "I think it gives you cause for pause". Indeed, business confidence has already been dropping in recent weeks.
This issue also draws attention to a wider problem for the government. It has vowed not to raise taxes on "working people". Specifically, that means no increase to income tax, national insurance or VAT. But it will struggle to raise the kind of sums it needs off the backs of businesses and wealthy individuals alone. At the same time, higher taxes on those groups cuts against Keir Starmer's central pledge, to make Britain the fastest-growing economy in the G7.
In some ways, the non-dom story isn't all that important. There are fewer than 84,000 in the country, and the money set to be raised from closing loopholes was paltry by the standards of Britain's budget. But it sheds some light on the bind in which the government finds itself: how to grow the economy and fund better public services without resorting to broad-based tax rises.It is going to be mighty difficult to square that circle come October 30.
