All taxes take, but some also destroy. A good tax raises revenue with the least possible damage to the activity that produces it. A bad tax discourages that activity, so it shrinks the very base it feeds on. Britain has collected a fine assortment of bad ones.
Taxes on labour
Work is how most people create value. Tax it heavily and you get less of it. Income tax and National Insurance together make each extra hour less worth working, each promotion less worth seeking and each second job less worth taking. Some earners face effective marginal rates of 60 per cent as allowances are clawed back. Nobody designed that deliberately. It simply accumulated, like barnacles on a hull, slowing the ship a little more each year. A country that wants growth should want people to work, earn and advance. Taxing effort is a strange way to show it.
Exit taxes
An exit tax turns a country into a cage. It tells citizens they may leave, but only after paying a ransom on their own assets. A nation confident in what it offershas no need to lock the door. Even worse, the deterrent works backwards. Talented and wealthy people deciding where to settle notice how hard it is to leave. A hotel that charges you to check out will not have many guests checking in.
Taxes on income earned abroad
Taxing money made overseas means taxing activity the British state did nothing to support. It had no hand in the roads, the courts or the workforce that produced it. The old non-dom regime understood this. It attracted people who brought spending, investment, employment and philanthropy, while asking little of the public purse. Its abolition was meant to raise revenue. What it raised was suitcases. The Times reported that 78 centi-millionaires and 12 billionaires left in a single year, and advisers now say the predictions of a wealthy exodus have turned out to be reality rather than hype. People who leave pay nothing at all.
Inheritance tax
Inheritance tax falls on money that was taxed when earned, taxed when saved and often taxed when invested. Death is then treated as one more taxable event. It punishes thrift and rewards spending. The person who blows everything on cruises pays nothing. The one who builds something to pass on is penalized. It breaks up family firms and farms that took generations to build, and forces the sale of productive assets to pay a bill. For all that pain it raises less than one per cent of tax receipts. It is a tax on prudence, paid mostly by those who could not afford the planning to avoid it.
Wealth taxes
A wealth tax charges people for owning things, whether or not those things produce any income. It forces owners to sell shares, land or businesses simply to pay the state for having them. It requires armies of assessors to value assets that have no market price. And it fails on its own terms. Twelve OECD countries had wealth taxes in 1990. Most have since scrapped them, having found they raised little, cost much and drove capital away. Capital is the seed corn of growth. Eating it makes for a thin harvest.
Other taxes hostile to freedom and growth
Capital gains tax often taxes inflation rather than real gain, and it locks investors into assets they would otherwise sell, freezing capital that should flow to better uses.
Stamp duty taxes movement. It keeps people in homes too big or too small, stops them moving for better jobs, and gums up the housing market. It is a toll on mobility.
Taxes on dividends and savings tax the same money twice. Profits are taxed in the company, then again when paid out. Savings are taxed when earned, then again on the interest they yield.
Windfall taxes are retrospective punishment for success. They tell every investor that the rules may change once a venture pays off, so every future project carries a political risk premium.
Business rates tax investment in premises before a penny of profit is made. They have hollowed out high streets and penalize firms for improving their property.
Employer National Insurance is a tax on jobs. It makes every hire more expensive, and the cost lands ultimately on wages and employment.
What links all of these is the same error. They treat wealth as a fixed pile to be divided, when it is a flow to be encouraged. Governments that keep taxing the goose rarely notice it has flown until they go looking for the eggs.
Madsen Pirie