Confessions of a Political Animal

April 23, 2009

Brain drain or brain dead?

darlingSo now we know. You only have to wait twelve years into a Labour government before you get a sensible top rate of tax. Much celebration ensued yesterday at the Town Hall when we realised that our beloved Chief Executive would be…erm…required to contribute generously to the economic recovery.

And why these sour grapes from a certain Mr Boris Johnson Esq? According to the BBC’s budget calculator, a hard-working 44 year old married man with 4 children under 16, earning £137,759 a year, plus £250,000 of self-employment income, will be £455.32 better off, thanks to the Chancellor’s largesse.

But to be serious, whilst the introduction of the 50% tax band is welcome, it is as Polly Toynbee rightly says, too late. Whilst I thought Cameron’s budget response to be a rather empty exercise in rhetorical grandstanding, the likes of which I haven’t seen since the Animal last attended a university debating club, one of his attacks ought to stick, although not really as Cameron meant it. Criticising the level of the budget deficit and the PBR, he rehearsed the old line about Labour ‘not fixing the roof while the sun was shining’.

Obviously, this is a simplistic bit of phraseology: there are (at least) two roofs – the public finances and public services. The simple fact is that probably no incoming government since 1945 has inherited a public services roof in quite such bad condition as Labour did in 1997. In many parts of the roof, the shelter was provided by (to stretch an analogy) a few pieces of canvas carelessly tacked over gaping holes. To a degree, the current government has done a commendable job of fixing the worst of those holes. But Cameron has a point – the public finances roof needed running maintenance as well. But I cannot agree that this should have been achieved through lower public spending: rather it should have been achieved through a maximisation of tax revenues during the ‘good times’. A 50% (or even 45%) tax band introduced in 1997 would have been a much more effective tool for the buffering of the public finances than it will as an afterthought in 2009.

This is a futile argument over spilt milk, however. What matters now is that the argument for an equitable and affordable tax system is now made and won, in order that effectively banded income tax survives the immediate economic crisis and is refined and enhanced in years to come.

The immediate reaction from the economic right to Darling’s income tax announcement has been pretty inevitable. It is, we are told, a ‘tax on success’ (which only really holds if your only definition of success lies in the pay packet), or the harbinger of a mass exodus of the wealthy and ‘succesful’ from these shores. Inevitably, self-appointed guardian of the nation’s morals Mr Guido Fawkes places himself firmly on this particular bandwagon, claiming that he is already receiving emails from high-earning acquaintances planning to leave the UK. I stopped taking such threats seriously after noticing that Paul Daniels and Frank Bruno still seemed to be in the country despite their promises to the contrary in the event of the election of a Labour government.

The claim that an increase in tax rates will lead to a fall in tax revenue either through emigration or tax avoidance is one of the right’s all-time-classic tunes dating back to the 1980s heyday of supply side economics. It’s nice to see the good old Laffer Curve making a comeback, broadly discredited as it may be. No less a personage as George Bush Snr, in his salad days, described Ronald Reagan’s fixation with the Curve as ‘voodoo economics’. This was proved to be remarkably prescient: the Reagan administration’s policy of cutting taxes in order to increase tax revenue did such wonders for the US’ public finances that the deficit tripled during his time in office.

One of the key problems with the arguments of the advocates of Reagonomics, is the assumption that seemingly at any given moment the country in question is already operating on the right-hand side of the Laffer curve, i.e. beyond the point of optimum taxation. Thus, tax cuts will always lead to increases in government revenue. Except – there is rarely any evidence to that effect. If the UK is indeed past the top of the curve, then tax increases such as the 1% hike in National Insurance contributions in 2003 would have led to a cut in tax revenue levels. Of course, the truth is that these continued to grow until the external factor of a economic slump impacted upon them severely. It is also clear that the most recent tax cut, the 2.5% reduction in VAT, has been a net negative on the Exchequer, not a positive. If we accept Arthur Laffer’s premise of a curve, therefore, it seems perfectly probable that the UK is still operating on the left-hand side of it: i.e. tax increases lead to increased tax revenue.

And does the bleating about a brain/success drain even hold water? It certainly isn’t clear that it does. Certainly, there will be anecdotal evidence about a few wealthy stockbrokers heading off to overseas tax havens (where they will hopefully find it a little harder to evade UK tax in future) and some footloose companies hopping elsewhere. But the numbers seem unlikely to be vast. After all, why haven’t they already gone given that the increase from 40% to 45% was announced last year? Is a move to 50% really crossing the Rubicon? Won’t the super-rich have faith in an incoming Cameron government to protect them? We would expect, if this was likely to be a significant phenomenon, that the top rate tax bands in some of Europe’s more fiscally hungry nations would be to all intents and purposes empty, thanks to mass emigration to less benighted shores. Oddly enough, this seems not to be the case. According to the far-from-tax friendly Center for Freedom & Prosperity, in 2006 no fewer than 20% of Swedes were paying a tax rate of around 56.5% on their income.  That’s around 1.8 million people who haven’t fled the tyranny of the tax. And, as usual, the Center is able to offer nothing more than anecdotal evidence of brain drains and mass emigration.

I find it highly unlikely that there will be what Guido describes as a ‘Taxodus’ from Britain as a result of the new higher rate. When you look at the alternatives he offers, it looks all the more unlikely:

Good news for Dublin and Dubai.  They will welcome entrepeneurs [sic] with lower tax rates and open arms. 

What a choice! Either a bust Celtic Tiger, whose economy is forecast to shrink by 8% this year by the IMF, is itself raising taxes whilst halving the unemployment benefit payed to the under 25s; or an undemocratic fiefdom whose prosperity has been built on bonded and trafficked labour that Britain hasn’t seen for over a century. If so-called ‘wealth creators’ decide that 50% on a proportion of their rather obscene earnings is too much to swallow and head for one of those welcoming climes, it is hard not to think ‘good riddance’. They evidently lack either the economic or moral sense to be of any great benefit to Britain.


1 Comment »

  1. “Self-appointed guardian of the nations morals”? Didn’t even know there was a vacancy.

    Not me. Am a libertine as well as libertarian. Just concerned at what happens to public money.

    Comment by Guido Fawkes — April 23, 2009 @ 9:02 pm | Reply

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