Will the 50p rate cost £350bn?
Tim directs our attention to this paper (pdf) from the Adam Smith Institute, which claims that the 50% top tax rate “risks a cumulative fall in tax receipts of £350bn or more” over the next decade. I have five problems with this:1. The historic evidence they give that “when high tax rates go down, public revenues go up” looks like the post hoc ergo propter hoc fallacy. Such tax cuts are sometimes accompanied by growth-friendly policies such as deregulation that would raise tax revenues anyway. A good example here is the Lawson cut of 1988. It came a few months after “Big Bang” encouraged the growth of a high-wage financial sector. It’s quite possible that top tax revenues would have risen, even without the tax cut. Young and Saltiel give us no reason to reject this possibility.This matters now, because top-earners’ decisions on whether to leave the UK or not are not merely dependent upon the tax rate, but upon likely future financial regulation too. Even if we do see a significant outflow of high earners, it needn’t be (solely) because of the higher top rate.2. There’s no engagement with the alternative evidence, some of which suggests that higher tax rates, within reason, do not reduce revenues and lower ones don’t raise them. This omission matters, because the issue here is one where the evidence is ambiguous and patchy. To pretend otherwise is dishonest.3. The estimate that we’ll lose £350bn or more seems to rest heavily upon the evidence that a minimum of 25% of personal taxpayers and 15% of corporate taxpayers are “contemplating non-residency.” But it doesn’t matter jack what people are contemplating. There’s no doubt that top-earners are moaning about the 50p rate and “contemplating” moving overseas. But as it stands, a lot of this is idle whining which, as the FT says, is “of questionable credibility.” Of course, some people will move overseas as a result of the higher tax - but in the social sciences, pretty much anything is true of some people. The question is: is there a significant number of such people? And two things suggest not....4. If people were actually moving overseas, you’d expect to see prime London house prices and rents fall, as top-earners sell up and demand declines. But this just isn’t happening. Here’s Knight Frank:
In the four months to the end of February [prices] rose by 4%…The most important factor driving price growth, has been growing demand for London property from international buyers.
The prime London rental market is now characterised by severe stock shortages and very high levels of demand.
This matters. House prices should, in theory, be a forward-looking indicator. They should today embody expectations of future demand. The fact that prices are high, therefore, indicates that the market does not anticipate significantly reduced demand. Of course, you could argue that the market is systematically irrational. But if I were the Adam Smith Institute, I wouldn’t go there. 5. So far this financial year, income tax receipts have been surprisingly strong - more so than national insurance. This is inconsistent with the notion that the 50p rate is having a swift and strong adverse effect on revenues.Now, I don’t say all this to assert for certain that the higher top rate will actually raise revenue over the long-run. I’m not convinced it will. But nor am I convinced by a mix of whining, post hoc ergo propter hoc fallacies and selective reading of the evidence.