Politics and Economics

Why We Cannot Increase Taxes On The Rich

In the UK we have an annual £100,000,000,000 + deficit which is bloating our £1,400,000,000,000 + debt. The current interest payments are greater than the defence budget.

Remember in Britain more than half the adult population receive more in benefits than they pay in tax i.e. the majority are supported by a minority of tax payers – so the “rich” are already contributing.

Let’s try a thought experiment.  If we taxed everybody at 100% of his or her income we would collect very little tax.  Few people would work for no money.  If we set income tax at 0% we would collect no money. Therefore (logically) there is an optimum top tax rate whereby we collect the most tax.  Labour believed this was 40% for all but one month of their 13-year rule.  The current administration thinks it is 45%.  However all agree that taxing too much collects less tax.  We are just arguing about the correct percentage.

But can we squeeze the rich some more? A simple calculation:  Suppose we ask all people earning over £100,000 to pay an additional £30,000 tax per year on top of the tax they currently pay?  Totally ludicrous of course, as most earn little more than £100,000 and couldn’t find it, and those that earn significantly more (the one’s we all really want to tax) can easily move country and pay us no tax at all.  The constraints on incentives and resulting talent drain would make this whole concept fanciful as a way of raising revenue……but just for the sake of illustration let’s suppose it was possible…..

We have 500,000 people in the UK who earn more than £100,000 in salary (personal taxation, PAYE and Schedule D) so, best case scenario, we’ve raised £15 billion.  We’ve reduced the deficit from £105 billion per year to £90 billion per year.  Now what?

There are others who take their income in other ways e.g. company dividends, investments, trusts etc.   However these people are not tied to the UK by employment and can easily move to a more tax friendly country if the tax regime becomes punitive.  The recent experience of the socialist President Hollande of France in trying to raise significant tax from “the rich” shows that this is not practical.  He failed to raise any significant revenue.  Any increase in his take of tax was negated by a reduction in economic activity, as the incentives to do business in France were reduced, and rich citizens fled to Belgium, Switzerland and the UK.

Tax revenue will get nowhere near reducing the deficit, let alone the debt.  Micturition and hurricanes spring to mind.  Massive public spending cuts are inevitable.

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