High tax rates are counterproductive

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Recently, and most unusually, I felt moved to disagree with commentator Fraser Nelson (whom I usually find very much on target).  So it is a pleasure to come back with thoroughly positive comment on his most recent column

First of all, he takes apart Ed Miliband’s catchy but mendacious one-liner, when he said that Britain is a “zero-zero country” where the rich pay zero tax, while the poor get zero-hours contracts. Rhetorically clever, but factually incorrect.  And a fairly nasty piece of class-warfare, aiming to whip up hatred and resentment against the successful and the enterprising.

(In fact we read that 60+ Labour MPs have staff on zero-hours contracts).

The same edition of The Sunday Telegraph reports that the top 3000 earners pay more tax than the bottom nine million (4.2% against <4%).  And the top 10% of tax-payers pay 55% of total income tax.  Those are stunning statistics, but they beg the question: “OK.  But shouldn’t they be paying more pro-rata?”.  Indeed they should.  No one could complain if they were.  But they are paying disproportionately more than the rest.  The top 0.1% of taxpayers earn 5% of the nation’s income, but pay 11.3% of the tax.

Fraser Nelson points out that with a mere 3000 people paying 4%+ of UK income tax, the government would be well advised to avoid confiscatory taxes which might drive these highly mobile individuals to decamp to more favourable tax régimes.  Like Hong Kong, say.  It would be counterproductive to reinstate the punitive 50% marginal tax rate.  And vice versa, it might well bring in more revenue (and more investment) if we went back to the 40% figure.  After all when Labour raised the top rate, it was not an economic measure, but a deliberate political spoiler for a subsequent Conservative-led administration.

But it’s not just the top 3000.  I’ve written about this often, but it bears repeating: economies are dynamic, not static.  If you change a major item like the top rate of tax, people will change their behaviour accordingly (as they are perfectly entitled to do).  The rich and mobile may simply go abroad.  British and foreign investors may prefer to invest elsewhere (as if we weren’t already driving them away with energy prices).  With high marginal rates, entrepreneurs might decide not to launch a new business.  Top earners may see a trade-off between income and leisure, and decide to retire early, or work fewer hours.

Others may hire fancy accountants to find ways to mitigate their tax liability, which within the law they have every right to do.  At a lower level, workers may decide to do less overtime.  And at the margin, higher tax rates promote the black economy, and create a disincentive to work.  That’s why high taxes damage growth, prosperity and employment, and may actually reduce tax revenues for the Treasury.

So we must face down the cheap Labour slogans about “tax hand-outs to the rich”.  For a start, it isn’t a “hand-out” if the government decides to confiscate less.  And secondly, the slogan’s implicit assumption is that lower tax rates for the higher paid mean lower revenues for public services and help for the poor.  But that is just plain wrong.  On the contrary, high tax rates on the better-off are bad for all of us, including the less well-off.

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3 Responses to High tax rates are counterproductive

  1. Ian Terry says:

    Very well said Roger. What Labour sow so they reap. When I read that our Nigel will get in bed with them to achieve his aims I cringe I really do. The way that politics is opening up especially here in dictatorship Scotland I can see our last Fuehrer being invited in by Ed then sit back and watch the demise of the UK. This country never seems to learn from its past mistakes especially regarding taxes and energy. Your little quip about energy prices duly noted!!!! When the political elite bang on about poverty and climate change effects in Africa they want to take a bl###y hard loook at the real state of play over here. How many food banks have we now? Add to reach the reports are now we are having to create childrens food kitchens to ensure some get at least one square meal a day. The lunatics have taken over the asylum.

  2. Julia Gasper says:

    What the hell is UKIP doing appointing an economic spokeman, Patrick Flynn, who publicly says that businesses should pay more tax? If we cannot offer businesses the conditions to compete with other parts of the world, where business tax is often nil, we will find that more and more businesses decide to re-locate elsewhere. Investors will see no reason to set up here. We could resort to protectionism but there would be swift reprisals.

  3. Pingback: MICHIGAN SALES TAX RATE 2015

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