There are plenty of reasons we might want moderately high top tax rates. If we do them cleverly (e.g. taxing consumption, not income, and definitely not capital or transactions) they can raise the revenue we may need for redistribution and goods everyone seems to believe only the government can provide, while not causing too many efficiency costs.
But there are also lots of reasons we might not want tax rates to go up too high. Eventually we pass the top of the Laffer Curve (it probably peaks when marginal rates + national insurance + benefit withdrawal + the tax rate effects of VAT + so on are roughly 60%, so about now) so we can cut rates and raise revenue—everyone benefits. Higher taxes means lower growth.
Another is that today's top 1% most skilled people are less rooted than ever before, and seem willing to work in Hong Kong, New York, Geneva, Paris, Los Angeles or wherever things are better. This means that changes in top tax rates can have substantial impacts. A new paper shows that this applies not just to bankers (witness the flood of French financiers to London) but also to top inventors.
"Taxation and the International Mobility of Inventors" (pdf), from Ufuk Akcigit, Salom Baslandze and Stefanie Stantcheva, finds that:
This paper studies the effect of top tax rates on inventors’ mobility since 1977. We put special emphasis on “superstar” inventors, those with the most and most valuable patents. We use panel data on inventors from the United States and European Patent Offices to track inventors’ locations over time and combine it with international effective top tax rate data. We construct a detailed set of proxies for inventors’ counterfactual incomes in each possible destination country including, among others, measures of patent quality and technological fit with each potential destination. We find that superstar top 1% inventors are significantly affected by top tax rates when deciding where to locate.
The elasticity of the number of domestic inventors to the net-of-tax rate is relatively small, between 0.04 and 0.06, while the elasticity of the number of foreign inventors is much larger, around 1.3. The elasticities to top net-of-tax rates decline as one moves down the quality distribution of inventors. Inventors who work in multinational companies are more likely to take advantage of tax differentials. On the other hand, if the company of an inventor has a higher share of its research activity in a given country, the inventor is less sensitive to the tax rate in that country.
The paper comes with some fascinating charts, showing just how many useful patents come from the most productive inventors.
It seems pretty reasonable that there are benefits to the UK of having productive inventors in the UK rather than elsewhere—although it may not come out as a net benefit to the world unless there are network benefits to the kinds of big agglomerations of research activity that are building up around Oxford, Cambridge, Manchester and London. But even if that isn't true, it goes to show that people really do respond to incentives.