Wednesday, September 7, 2011

Having a Laffer

So, whilst the deficit reduction strategy of the UK government runs into the not entirely unexpected collapse in economic growth, a fierce rearguard action is being organized to abolish the 50% tax rate for high earners introduced by Gordon Brown.

Perhaps the best comment on this is from Newsthump, the satirical web paper: '50% tax rate damages people who pay 50% tax rate, say people who pay 50% tax rate'. But beyond the obvious self-interest at play in these demands, it's worth examining just what is so bad about the 50% tax rate.

First, there is a bunch of evidence that the tax take has gone up as a result of this (estimates suggest it will raise £12.5 billion more over five years). £12.5 billion does not eliminate the deficit on its own, but it's not small change.

Second, are we sure that we really don't want high earners to leave? The damaging effects on the economy would stem from disinvestment, or the providers of valuable services no longer providing them here. But so much of this money is rent-seeking that I'm not that sure these effects would be so terrible.

Third, if we accept that the highest paid will leave the moment we tax them a little more, then we may as well give up on the idea of a cohesive society - so much income is now concentrated in few hands that failure to tax that income properly leads to extremely disruptive social divisions. We've seen a bit of that recently.

In any case, what's striking here is that various western countries have recently seen their highest paid citizens arguing that they should pay  more  tax. Britain's wealthy, it seems, are entirely free of this kind of social responsibility.