FactCheck: Why less is more when taxing the super rich
The claim
“If a small portion of these highly mobile workers move elsewhere because of the 50p rate then it is clearly a self-defeating way for the Treasury to try to raise money”.
Letter to the Financial Times from Dr DeAnne Julius, chairman of Chatham House, and others, 7 September 2011
The background
Twenty leading economists have called on the government to scrap its 50p tax rate for high earners, warning that it will do “lasting damage” to the economy.
The 50p rate for those earning more than £150,000 is one of the highest in the world, making the UK “less attractive as a destination for both foreign investment and talented workers”, they said.
It was introduced as a temporary tax by the Labour government in the 2010 budget to tackle the deficit. Hitting the richest 1 per cent of taxpayers, it is expected to raise an average of £2.4bn a year.
But this is a drop in the ocean compared to the £496bn the government expects to raise overall this year. So is it really worth it?
The analysis
HM Revenue & Customs said it won’t know how much money the tax will bring in until the self-assessment tax returns for 2010-11 are finalised in January.
In the interim, both the Institute for Fiscal Studies and the right-wing think tank Adam Smith Institute point out there are lessons to be learned from the 1980s.
During the 1980s governments on both sides of the Atlantic raked in more money by lowering taxes.
In 1988, UK Chancellor Nigel Lawson slashed the top rate of tax from to 40 per cent, pulling in a quarter of all tax from the highest 1 per cent of earners.
His move more than doubled the taxman’s haul, which ten years earlier had reaped just 11 per cent from the same 1 per cent.
How? Put simply, the super rich will do anything they can to avoid paying more tax.
So by putting up taxes, the highest 1 per cent will look for tax loopholes or even leave the country. But if they feel they’re being treated fairly, they won’t go to such lengths.
Chancellor Denis Healey promised to “squeeze the rich until the pips squeak” by putting taxes up to 83 per cent – and the move saw the actors Sean Connery and Michael Caine quit the country, among others. The latter wrote in his biography that he didn’t want to leave Britain, but he couldn’t bear to pay so much. He has since returned.
Across the pond in the US, in 1981 Ronald Reagan prompted the largest tax cut in US history, pulling down the top rate from 70 per cent to 50 per cent. According to the Inland Revenue Service (IRS), this saw the super rich 1 per cent shouldering 27.5 per cent of the tax burden – an increase of 10 per cent.
President J F Kennedy said in 1963 that high taxes coupled with low revenues were a “paradoxical truth”. He concluded that the “soundest way to raise the revenues in the long run is to cut the taxes”.
And before him, President Calvin Coolidge’s Treasury Secretary Andrew Mellon said: “It seems difficult for people to understand that high rates of taxation do not necessarily mean large revenues to the government and that more revenue may often be obtained by lower tax rates”.
He cut taxes from 73 per cent to 25 per cent after World War 1 and nearly doubled revenues.
A study by the IFS found that the rich are “very responsive” to income taxes – but other taxes such as National Insurance and VAT are important too, since what really matters to people is what they can buy with their net earnings (after tax).
A high income tax will push the super rich to look for tax loopholes, and it could lead to a reduction in their spending, which would affect the amount raised by consumption taxes such as VAT, said IFS analyst James Browne.
If the rich reduce their spending by as much as their income is reduced, Mr Browne estimates that the government will collect £1.5bn less per year, slashing its income from the 50p tax rate to £0.9bn.
And that’s if they stay put. If the rich flee from the UK, the taxman will have even less to claim. These are the “behavioural consequences of the new higher rate of taxation” that Lord Myners warned of last year.
The verdict
The 50p tax rate will raise a relatively small amount for the taxman, and history has shown us that lowering taxes can boost or even double revenues – because the rich won’t go to such extremes to dodge them.
We have no way of knowing how many people have left, or will leave, the UK purely because of the 50p tax.
But we do know that the money coming in has dropped. The number of foreign investment projects pumping money into Britain dropped by 11 per cent during 2010/11. And this cut the number of jobs created by a fifth, according to UK Trade and Investment.
As the economists’ letter to the FT pointed out, Britain has slipped from second to fourth place as a destination for inward investment.
Mr Osborne said last month he didn’t see the tax lasting because it’s “very uncompetitive internationally, and people, frankly, can move”.
He’s right; in which case stalling the decision must be because of the politics.
For as Shadow Chancellor Ed Balls said today: “Millions of struggling families and pensioners on middle and low incomes will wonder why the only tax rise or spending cut George Osborne is willing to reconsider is the top rate of tax for the very richest.”
By Emma Thelwell
There are 19 comments on this post
Is there a clear link between Britain slipping from 2nd to 4th as a destination for inward investment & the 50% top rate of tax? What other factors might have caused this? The UK economy (not least due to Government decisions of public spending) is going to be flat, with minimal growth at best. So why would potential investors come here? While what the economists say might be true, there’s also a strong argument for a degree of solidarity overall, so that the richest don’t get their taxes reduced while the rest face increased costs (e.g. resulting from cuts in Child benefit), unemployment or just the effects of cuts (from which, by and large, the richest are immune). This is where ethics (remember them immediately after the riots?) come in. But I’d like to see some proper regression analysis of the various factors that might have affected the UK’s place as a destination for inward investment before I’d fall for what seems to me to be a simplistic & self-serving arguemt for making the rich richer, at a time when the gap between rich & poor is widening. A factor in the riots which the Government is happy to let fade away while they concentrate on the “feral underclass”
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Cathy/Emma,
Oh for God’s sake…..
So the rich want more and would vote against paying a fairer, higher rate of tax than lower paid citizens? And this is NEWS?
Why, then, bother pursuing the bankers and other gangsters who’ve ripped off most of the Western economies?
So some of them would leave if they get taxed fairly? SO WHAT? Get shut of them, the REAL scroungers and whingers. Maybe then we can build a better society based on honesty and fairness.
I still have never heard an adequate answer to this question: if it is necessary for workers to accept lower wages “to make them more competitive,” why is it necessary for the idle rich to accept MORE wages “to make them more competitive”? How can anyone fall for this hypocritical, lying garbage?
Actually, of course, the reason these bought-and-paid-for ultra right economists have opposed fair taxes is because they know full well what the implications are. Once the precedent is set for fairness it would encourage the same things in other parts of the economy.
So if some of the whiners and scroungers want to leave I say good riddance. We don’t want you. You add nothing to our society.
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While I agree with the sentiments of the excessive 50p tax being too high, there needs to be a fundamental shifting realignment across the board.
This includes raising the personal allowance to £12,000 as the Lib Dems stated before the election. The government should also be closing loops hole for tax evasion by major corporations and lowering the corporate tax rate to the EU average of 23%.
We must be competitive for foreign investors, but that should not be at the expense of the majority of the population.
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Why not just close the loopholes and stop dodgy accounting?
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The figures seem to disagree
http://www.guardian.co.uk/money/2011/sep/07/top-tax-rate-george-osborne?CMP=twt_fd
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But:
‘In “Millionaire Migration and State Taxation of Top Incomes: A Natural Experiment,” Cristobal Young (Stanford) and Charles Varner (Princeton) analyze the effects of a new “millionaires tax” in New Jersey, which now has one of the highest top marginal income tax rates in the country. Here’s how the Wall Street Journal describes the findings:
The study found that the overall population of millionaires increased during the tax period. Some millionaires moved out, of course. But they were more than offset by the creation of new millionaires.
The tax rate, they concluded, had no measurable impact.
“This suggests that the policy effect is close to zero,” the study says.’
http://daily.sightline.org/2011/05/04/do-the-wealthy-flee-income-taxes/
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Investigating why this issue has been raised for discussion at this particular point in time, and manages to get air time would merit some interest.
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This is a poorly argued and sloppy piece. It is hopelessly selective & cites ridiculous examples – who gives a damn if Caine chooses to move elsewhere because he dislikes the tax rate?
More generally, the very rich with modern communications can mostly base themselves “anywhere”. Yet, and this is the point, they CHOOSE to base themselves in the UK as a matter of personal preference. This maybe because they’re British born, or maybe because their own countries are too unstable or unsafe, or, lastly, maybe simply because they HAVE to as their job demands it (in which case their threat to leave due to income tax is empty).
In short, if these very rich people are benefiting from the attractions / advantages that British society offers they should make a commensurate financial contribution in tax.
In terms of the figures Thelwell quotes, the effects of changes in the level of income tax mean nothing if taken outside of the context of the particular economic situation they relate to. E.g Income tax receipts are clearly dependent on incomes and GDP!
If incomes were taxed at 75%+ I would have reservations, but to think 50% too much? No way. They should shut up and eat their…
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So, it passes the Channel 4 fact check but has precious little chance of being reflected as such in Channel 4 News?
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Income tax is a tax on labour which makes it more expensive, hence left jobs. Saying rich people will work less hard is a bit of stretch though.
It’s not the whole story though, inequality makes society more unstable and vulnerable to booms and busts with a whole load of other issues too. We need a tax on land wealth and ‘tobin tax’ and less illegal wars.
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It was the richest 1% which caused the financial crisis.
They also disproportionately raise house prices higher than normal people can pay for.
They also distort local economies in many other ways – rich people cause inflation!
It’s not about the tax take, it’s about all the other problems they cause – get rid of them.
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Looks like we need to do more to stop tax evasion/ avoidance.
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Mr Osborne said last month he didn’t see the tax lasting because it’s “very uncompetitive internationally, and people, frankly, can move”.
Well let them move.
If slipping to fourth place for inward investment, which after all is still competitive those not in the first three, it is not a bad price for social harmony.
The phrase “we are all in it together” has never sounded so false as it does now.
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I’m always struck by the fact that it is a generally accepted truth that the richest can never have enough money and if their wealth is attacked it is bad for everyone.
Meanwhile, those at the other end of the scale apparently don’t need to have any incentives, indeed hitting them with things like a VAT increase is considered a sensible way to reduce the deficit.
Could it not be that while the relatively poor don’t leave the country or hire expensive accountants to reduce their liability, their demoralisation is just as damaging to economic recovery?
Or are the top few per cent so special that they really need even more cossetting than their enormous wealth gives them?
And is there not a flaw in the drip-down theory when the facts show that the gap between richest and poorest is getting bigger?
Not so much drip down as suck up, in more senses than one.
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I agree that it would be immoral to remove the 50p tax rate alltogether although I do think that there should be an exemption scheme for entrepeneurs so that they are encouraged to set up and maintain their businesses in the UK.
I think it would be worth considering a 50p tax waive (i.e. a reduction to 40p) for entrepenurs who create jobs (i.e. by employing their own full-time staff in an organisation that they founded or own a controlling interest and are the directing mind and will, or by entering a dying organisation as a new director and turning it around). The exemption could also apply to people who employ on a full-time basis, any domestic staff.
The rationale is that these high earners would be contributing to the recovery of the economy by creating jobs and increasing the tax paying population.
The result would be that only high earning employees who do not create jobs would be required to pay the extra 10p.
The idea is clearly a bit raw but worth consideration.
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There is one fundamental difference between people paying 50p in the £ tax and those either paying at a lower rate or not paying any at all.
The former will generally be accumulating capital for future use, the latter more likely to be struggling to cope with current living expenses.
Who are the more likely to be able to afford a lower change in lifestyle if any?
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[...] Why less is more when taxing the super-rich: FactCheck investigates [...]
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[...] This article explains why the idea of reducing taxes can sometimes increase tax revenue. In 1988, UK Chancellor Nigel Lawson slashed the top rate of tax from to 40 per cent, pulling in a quarter of all tax from the highest 1 per cent of earners. [...]
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Is it time for a follow up to this now the facts are available?
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