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Never, ever, forget the tax wedge

Summary:
The famed Laffer Curve is an observation about reactions to changes in the income that can be acquired through offering labour out into the market. It’s only a subsidiary use of that observation that some strive toward a target income, others more affected by marginal gains, which concerns taxation rates. The tax is a trigger for those income changes, but the observations would be true if there were some other factor changing income due from that labour.That we use it to talk about the tax wedge - the difference between pre-tax and post-tax prices and reactions to them - just shows how important the tax wedge is when considering reactions to prices.At which point something which we don’t think is true: Currently at 0 per kilowatt hour, once battery storage falls to 0 per kilowatt

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The famed Laffer Curve is an observation about reactions to changes in the income that can be acquired through offering labour out into the market. It’s only a subsidiary use of that observation that some strive toward a target income, others more affected by marginal gains, which concerns taxation rates. The tax is a trigger for those income changes, but the observations would be true if there were some other factor changing income due from that labour.

That we use it to talk about the tax wedge - the difference between pre-tax and post-tax prices and reactions to them - just shows how important the tax wedge is when considering reactions to prices.

At which point something which we don’t think is true:

Currently at $150 per kilowatt hour, once battery storage falls to $100 per kilowatt hour, petrol and diesel cars will become uneconomic.

The untruth here is ignoring that tax wedge. As we’ve pointed out before the IMF claims that petrol and diesel are correctly - to within pennies a litre - taxed in the UK currently. Electric cars are, using the same calculation, distinctly undertaxed. For the correct taxation is not just about CO2 but congestion, VAT, accidents and so on.

This before we get to the political reality that government currently loves that £35 billion -ish a year from fuel duty and is going to replace it with another tax on the same activity if and when all is electric.

That is, the $100 claim is for untaxed electric as opposed to heavily - even if by one calculation correctly - taxed ICE. The correct comparison should be between electric as it will be taxed and ICE as it is taxed. Our estimation here - admittedly, using the ASI calculator of a wettened thumb held up into a following wind - is that it’s unlikely that electric vehicles ever will be cost competitive with internal combustion engines. Not when we include the tax wedge, which is the only way to properly evaluate such things in the real world.

Batteries plus £35 billion a year in tax are not going to be cost competitive with ICEs plus £35 billion, nor batteries without tax against ICEs without tax.

Given the estimation method here we do welcome more accurate calculations and if the facts do change we’re entirely willing to change our minds on this. We think it unlikely we’ll have to.

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Tim Worstall
Tim Worstall is a British-born writer and Senior Fellow of the Adam Smith Institute. Worstall is a regular contributor to Forbes and the Register. He has also written for the Guardian, the New York Times, PandoDaily, the Daily Telegraph blogs, the Times, and The Wall Street Journal. In 2010 his blog was listed as one of the top 100 UK political blogs by Total Politics.

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