Get More Income by Soaking the Rich?

At the moment, Obama and the Democrats seem to be hanging tough on demanding that tax rates on high earners be increased.

This in spite of the fact that the president’s own commission (Simpson/Bowles) recommended reducing top tax rates, and gaining revenue by closing loopholes.

But the notion that higher rates will produce more revenue is just grossly simplistic. Some evidence comes from the United Kingdom.

Almost two-thirds of the country’s million-pound earners disappeared from Britain after the introduction of the 50p top rate of tax, figures have disclosed.

In the 2009-10 tax year, more than 16,000 people declared an annual income of more than £1 million to HM Revenue and Customs.

This number fell to just 6,000 after Gordon Brown introduced the new 50p top rate of income tax shortly before the last general election.

The figures have been seized upon by the Conservatives to claim that increasing the highest rate of tax actually led to a loss in revenues for the Government.

It is believed that rich Britons moved abroad or took steps to avoid paying the new levy by reducing their taxable incomes.

George Osborne, the Chancellor, announced in the Budget earlier this year that the 50p top rate will be reduced to 45p from next April.

Since the announcement, the number of people declaring annual incomes of more than £1 million has risen to 10,000.

However, the number of million-pound earners is still far below the level recorded even at the height of the recession and financial crisis.

Last night, Harriet Baldwin, the Conservative MP who uncovered the latest figures, said: “Labour’s ideological tax hike led to a tax cull of millionaires.

Far from raising funds, it actually cost the UK £7 billion in lost tax revenue.

“Labour now needs to admit that their policies resulted in millionaires paying less tax and come clean about whether they would reintroduce this failed policy if they were in power.”

A less journalistic analysis of the effect of the high tax rates reaches generally the same conclusion.

• The 50 per cent additional rate of income tax was introduced on 6 April 2010. It was the first increase in the highest rate of tax in the UK for over 30 years, and was expected to yield around £2.5 billion. However, because of the uncertainty regarding how those affected would respond, and its impact on the economy, the yield estimates were highly uncertain.
• This report provides the first comprehensive ex-post assessment of the additional rate yield using a range of evidence including the 2010-11 Self Assessment returns. The analysis shows that there was a considerable behavioural response to the rate change, including a substantial amount of forestalling: around £16 billion to £18 billion of income is estimated to have been brought forward to 2009-10 to avoid the introduction of the additional rate of tax.
• The modelling suggests the underlying behavioural response was greater than estimated previously in Budget 2009 and in March Budget 2010, decreasing the pre-behavioural yield by at least 83 per cent. This result is also consistent with that contained in the Mirrlees review, and suggests the additional rate is a highly distortionary form of taxation.

Bottom line: the increase in the tax rate distorted people’s behavior, causing them to arrange to reap income when the tax rate was lower, and had a major disincentive effect, causing people do things (work less, retreat to tax shelters) that reduced the yield by 83 percent compared to a “static scoring” (one that assumes that people faced with a higher tax rate act exactly as they would if faced with a lower rate).

But the truth is, the demand for higher tax rates has nothing to do with raising revenue.

It’s an attack on the social class that can earn high incomes in markets. And it is mounted not by the poor, but by the New Class: people such as academics, journalists, political activists and government bureaucrats who prosper as government grows.

Since their orientation is not toward producing for the market, and their incomes are lower than those who are similiarly qualified and educated and do produce for the market, they resent people who earn, in markets, higher incomes than they do.

So they demonize them (“vulture capitalists”) and try to seize their income. But the point is not really to seize their income and put it to uses the New Class prefers. It is much more simply to level down a rival social class.