There comes a point under every tax rate where raising taxes will cause less money to be raised. Those who can afford to do so may work less, because the trade-off of work to leisure becomes less profitable, increase their tax evasion efforts, or move to a different tax regime altogether. This isn’t a libertarian or “right-wing” argument, it’s a simple statement that if government wishes to raise as much revenue as possible, it should recognise that more is sometimes less. And then there’s the growth rate. Higher taxes mean lower growth, so the government should try to strike a balance between paying for itself and not being too much of a burden on private enterprise.
Our new report, The Revenue and Growth Effects of Britain’s High Personal Taxes (PDF), argues that Britain’s current income tax regime is too high. It looks at international comparisons of tax rates and notes that, in a ranking of the marginal tax rates of the 86 largest economies in the world, Britain comes 83rd. In other words, only three other large economies have higher marginal tax rates than Britain.
Surveys of businesses suggest that many are thinking about moving overseas. We saw that this week in the news that HSBC, which paid £1.2 billion in tax last year and did not receive any bailout cash, may be relocating its HQ out of London (though HSBC deny the rumours). There has been a 28% increase in the numbers of bankers moving to Zurich and, as Jan blogged on Monday, some hedge funds are moving to Malta. It’s hard to know exactly how many high earners will leave, but the fact that 1% of the country pays 24% of the tax means that even a relatively small number of people leaving can have big implications for the country’s revenues.
When Nigel Lawson cut the upper tax rate in the 1980s, revenues rose dramatically as the economy grew. As this report argues, the paradox that cutting taxes can sometimes boost revenues applies to Britain today, and the budget later this month should reflect this. If the Chancellor wants to to cut the deficit, he’ll need to cut taxes first.
You can download the report here.