Wednesday, 28 September 2011

50p Tax and Competitiveness

The current Tory-led coalition government, alongside economists, is currently pushing for a reduction in the highest bracket of income tax. Their argument is plain: the 50p income tax rate curtails growth because it works as a disincentive to entrepenuers, investors and talented workers, who would, consequentally, go abroad.

Frankly, their argument is little more than ideological cant and only engages with problems to the extent that solutions are ignored. Thus, I would like to present three points that covers a few of the basic errors in their view.

First, there is no consensus among economists (that is, academic economists) about the optimal tax rate, which is what, when we get down to it, we're actually talking about. The optimal tax rate, which is often explained by way of the Laffer Curve, is the highest tax rate that doesn't work to disincentivise investment, production and, well, work. The problem is that no-one knows quite at what point people become disincentivised (the highest point on the Laffer Curve.) Politicians and economists like to claim that it is lower than where we currently are, but studies vastly disagree and many point to an assymetric Laffer Curve with a optimal tax rate of 70% (although, mostly, it should be pointed out that work on finding the optimal tax rate is riddled with problems.)

Second, decisions to invest or to continue living in a country are, or at least I hope they are, not based solely on tax rates. Even if we were uncompetitve internationally (which we're not) there are many reasons why people would choose to invest or work in Britain. The motivations of people, like people, are quite diverse and not based solely on financial well-being. It may work as a disincentive, but we've got plenty of incentives so that it won't "wreck the economy."

Final point - and it's an important one - is that there are already systems that tax citizens regardless of which country they live in; it does not matter if people choose to go abroad. In particular, the US uses such a system. That's right - the system that many who oppose the 50p tax would like to see us emulate, has the solution. So, the threat to "go abroad" could easily be neutralised by policy change.

So, to sum up, even within economic thinking no-one really knows if a 50p tax rate hurts an economy by disincentising the population, non-monetary incentives exist and, in line with already existing policies around the world, it is an option to tax citizens regardless of state residence. The argument, then, for reducing the 50p tax rate has little foundation, but, in contrast, the argument for keeping the 50p tax rate, maybe even increasing it, is well founded.

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