Agreed. I stated elsewhere that if we’re in a situation where those on a 50p tax rate are so powerful that a number of them leaving the country does us significant damage, which can only mean that those not on a 50p tax rate are some how unable to fill the void their greed creates, then we’re in a situation where global to national competition is so poor that our problems can’t be solved with tax rate changes anyway.

The 50p tax rate is a toxic issue just like Mr Brown intended. There is a rather obvious question that you did not address and that is does it do any good. Maybe I am missing something but it is not obvious to me why a higher rate would make the UK a more attractive place to do business. If the risks are to the downside, what purpose does the 50p rate serve? Collective punishment?

I don’t think simple comparisons of tax rates between different countries tells us much. Foreign direct investors look at lots of things and the tax rates would not be first. Exchange risks, planning regulations, infrastructure, transport, legal system and the education and training of the local workforce would be higher priorities. The likes of Google will not go to Greece rather than Ireland if Greece do not have the educated workforce no matter what tax rates apply. However, it is almost impossible to believe that at the margin there is no negative affect on behaviour. If tax rates do not affect behaviour why do some people believe in imposing minimum prices on alcohol? They believe that such a system changes behaviour at the margin and tax rates must also change behaviour at the margin.

I think we need to be looking to reduce and eliminate taxes on labour at all levels of income. We introduced taxes on labour to fight Napoleon, and we still bloody have them. Almost any system of tax raising would be better than our current system.

“If tax rates do not affect behaviour why do some people believe in imposing minimum prices on alcohol? ”

That’s nowhere near a fair comparison, given that tax rates on alcohol are meant to be prohibitive to purchasing, where as a 50p tax rate on earnings over £150k is prohibitive of nothing nor intended to be.

It is the way that the principle changes behaviour, Lee Griffin. One can’t believe that one change affects marginal behaviour and the other has no affect on marginal behaviour. If the principle is that tax rates do not change anything then neither will minimum alcohol pricing.

@Richard W

The purpose of tax is to raise money. You idiot.

Thanks for that great insight, JW. You should apply for a job with the UK Treasury.

Richard, OP deals with behaviour change in point 1. Yes, some change at the margin is likely – but how quantitatively important is it. Re-read this classic S&M post on elasticity optimism – the evidence for a meaningful change in labour supply or entrepreneurial vim is non existent, if it was otherwise, then yes even lefties might worry about it (there’s no point in introducing a tax that reduces tax revenues)

“One can’t believe that one change affects marginal behaviour and the other has no affect on marginal behaviour. If the principle is that tax rates do not change anything then neither will minimum alcohol pricing.”

Yes you can, and one of the arguments against minimum alcohol pricing is that it is essentially saying that it’s ok to be an alcoholic as long as you’re rich enough, as there is no barrier for those on higher incomes, only to those the government is really targeting (kids and benefit claimants).

One can’t believe that one change affects marginal behaviour and the other has no affect on marginal behaviour. If the principle is that tax rates do not change anything then neither will minimum alcohol pricing.

No, but one can believe that, while accepting the *principle* that all changes affect marginal behaviour, that some elasticities are high and others are low.

For example, if you’re seeking to stop poor people from spending money on a luxury good, then increasing its price will work very well, because poor people demonstrate high price elasticity regarding luxuries (because, obviously, they can’t afford them otherwise.

On the other hand, if you’re seeking to deter bankers from working, then increasing tax on them will not work very well, because they will demonstrate low price elasticity regarding working. This is partly because their take-home pay even after subtracting 50% tax is still extremely high, and partly because in order to succeed in the world of banking you need to be a status-conscious workaholic by temperament.

Also, JW has a point: if the 50% tax rate were to raise money for the Treasury without harming the economy (despite, in this hypothetical example, not inherently helping the economy), that would be a good thing. It would mean transfer of income to people who have more than enough money to people who don’t (whether through direct transfer payments, through allowing cuts in other taxes, or through reducing cuts in public services), which is a change in distribution that only the most fanatical libertarian could object to.

Angry Bear is running a series of posts concerning the effect of individual income tax rates on the economy. The latest is here [I have only scan-read, but think they argue there is no sign that high rate hurt growth]

I can’t help but think that the premise here is just wrong. Taxes have to be raised, sad but true; to deny that this acts as anything other than a downward pressure on the economy though is very odd. Far better to admit the damage done and then explain that despite that, this particular tax is the least of the possible evils that we need to apply.

I admit that I don’t understand the argument for cutting this tax rate at all and I’m not really in favour of it in the first instance. I will also admit to not being a financial whiz but I cannot see how a 50p tax rate, or any tax rate on personal earnings, “deters inward investment, drives high-value executives — and businesses — out of the UK altogether, undermines our competitiveness, stunts growth, increases unemployment and makes us all poorer”.

That is what MEP Roger Helmer claims on his blog;
http://rogerhelmermep.wordpress.com/2011/08/19/nick-clegg-fool-or-charlatan/#comments

How many of the people paying this rate are really in the position to directly contribute to inward investment or the countries competitiveness any more than I am. They will not be leaving the UK because this is where their job is. How can any tax on personal income achieve all claimed?

A few business such as financial institutions, may move or consider to move because they can operate more cost effectively elsewhere. But it isn’t because a few of their top execs are paying 50% tax. It is because the whole business is cheaper to relocate and this has little to do with the rate of income tax and everything to do with business taxes and wages.

It’s tinkering around the corners of the problem so long as it only applies to wages. Income should be treated as unitary source, and taxed progressively regardless where it comes from.

These economists are most likely in the 50p tax bracket so they can take thier advice and shove it up thier arse.

to deny that this acts as anything other than a downward pressure on the economy though is very odd.

That’s certainly intuitive, and so may well be good politic, for a certain audience. Only problem is it appears to be wrong – very low personal taxes are consistently associated with low rates of entrepreneurship, growth, and other good things.

Could be the reason is that taxes raised are pretty much always spent in the same year they are raised. Or perhaps before, if you count government borrowing. Whereas most high income individuals have a positive bank balance, and so money they receive could well be out of circulation for decades. Especially if the banking system is not working well to promote domestic investment.

Or it could be that if becoming a finance lawyer or banker is a viable route to genuine riches, there is little incentive to do all the hard risky work of starting a business.

Or it could simply be that a government too stupid to get its tax from the people who have money will have a strong tendency to do something else equally stupid that _does_ have the effect of screwing up the economy.

It might be interesting to know which of these, or whatever other theory, is true. But in a way it is irrelevant.

What you do know is that any politician who calls for something that flies in the face of both the evidence, and all the logic of all their other rhetoric about hard times and tough choices, is one you can rule out ever supporting.

Presumably these ‘expert economists’ now predicting global catastophe akin to the asteroid that took out the dinosaurs if the 50p tax rate is not abolished immediately, they would be the same people who were clamouring for tighter fiscal regulation of the banks, for massively reduced government borrowing, higher interest rates to curb excessive personnel borrowing.
Or perhaps they were too busy trousering millions themselves?

@ Luis Enrique & John B

Yes, elasticities matter. However, one quickly learns that these debates are not around the nuance of elasticities. In fact, it is the complete denial that raising tax rates to any level has any negative impact. Unless the worker works for an NGO, NHS, public sector or green energy, they are quite obviously a complete bastard who should be taxed at 100 per cent with no downside.

I am not arguing that the government tax take should be reduced. That is really an issue around what size of state that we want and is a different issue. I just want us to face up to confronting the fact that the mobility of the world has changed and taxing labour is not the way ahead. That implicitly was what the economists letter to the FT was about. So, instead of taxing labour, tax other things instead and we can still have all those public services and transfers. I would prefer it if labour was taxed at zero as taxing labour is the least progressive tax system. However, those who see the tax system as a weapon to punish those they do not like will never agree. That kind of says all one needs to know about how they view labour. The result is the wealthy have run rings around them for decades and everyone else has to make up the shortfall.

I’ve no doubt that when the numbers come out they will show an increase in tax collection from the higher rate. The terminally myopic will declare the higher rate a success. However, what the figures will not show is how other variables offset from their potential. Even if other tax takes rise, they would have risen faster if our supply side had not been damaged through harming our growth potential. For example, France has a wealth tax that raises about $2.6 billion a year for the government. On the one hand, it is possible to think that it is raising revenue. On the other hand, the wealth tax has cost the country more than $125 billion in capital flight since 1998. It is just an illusion that the wealth tax is doing any good.

Richard,

but where is the evidence that our supply side will be harmed by this tax? If elasticities are low, in all dimensions (i.e. if it makes little difference to labour supply decisions, investment decisions, location decisions etc.) how is the supply side harmed? I agree its possible for reduction in the pie size to cancel out what looks like an increase in the tax slice, but a theoretical possiblity is not the same thing as a reality likelihood.

Quite difficult disentangling causation from correlation at the moment, Luis. Even when some valiant soul makes an attempt next year the findings will be disputed. Have a look through this CBI report and see what companies and mobile capital are saying themselves.
http://ukaapti.cbi.org.uk/media/19104/mtuktbpti_report_v9%5B1%5D.pdf

Our RGDP forecasts are continually being downgraded. Now I don’t believe for a moment that the higher tax rate is entirely to blame for lower growth potential. However, is it really impossible to believe that it is not a contributory factor? Duncan and Richard Murphy et al do not want to believe that the tax rate does more harm than good because they are intellectually invested in believing that it makes no difference. What would happen to Birmingham vis-a-vis Manchester if we raised marginal personal tax rates in Birmingham and not Manchester? Nobody believes that the effect would be zero. Yet, we are being asked to believe in a globalised interconnected world that something different magically happens at international borders. Too many people have still closed economy mindsets and do not appreciate how global the marketplace has become for capital and skills. One example is the oil industry is booming and North Sea operators are struggling to attract highly skilled professionals because those workers are operating in a global workplace. Those type of things filter down and also prevent the hiring of workers who would not be in the higher tax bracket.

The economist who wrote to the FT cannot be dismissed as a bunch of right wingers. As far as I am aware most of them are not in anyway right wing. The whole point of raising the higher tax rate to 50p was nothing to do with improving our economy or to raise revenue. It was a trap set by Mr Brown for juvenile tribal purposes.

well Richard, I’ll give you that the evidence base is thin to non-existent, so we are all probably working by guesswork, but I do not agree this tax has nothing to do with raising revenue, or the related issue of making the tax system more “fair” in some/many people’s eyes. Also I don’t agree my support of this tax rate is explained by a closed economy mind set – I simply think the impact on multinational location decisions is going to be small. Say this 50% rate raises £1bn (I have pulled that number out of my behind). You have to remember that the other choices we have – we must choose one of these – raise taxes by £1bn elsewhere, cut spending by £1bn, or run a deficit £1bn higher than otherwise, also affect the economy. Why is the harm done by the 50pct rate greater than the harm done by the alternatives?

11. Falco

Taxes have to be raised, sad but true; to deny that this acts as anything other than a downward pressure on the economy though is very odd.

I think tax is great.

The kind of taxes levied in the western World make for better, stronger and more dynamic economies.

The mad attempt sto lower tax have caused untold problems: mass unemployment, volatile markets, lower growth.

So your second assertion about drags on the economy are inaccurate too.