Monday, 22 February 2010

Why isn't Denmark empty?

There was a slight misconception underlying the reported comments of Gerry Holtham at our conference over the weekend. Since I wasn't at the session, I'm not entirely sure how and where the misconception arose. The implication of what was reported was that our proposal to reduce the level at which the new top rate of income tax would apply from £150,000 to £100,000 was a 'Wales-only' proposal. It was not. Since this is a UK election, our sums have been worked out at a UK level.

Notwithstanding that misconception, it's worth considering whether such a difference could be introduced on a 'Wales-only' basis, and what the effect might be. The suggestion of detractors is that any application of higher taxes in Wales than in England would more or less automatically lead to an outward migration. Actually, we can widen the issue beyond the 'Wales-England' scenario; some opponents of Labour's current tax proposals have argued that there will be an exodus from the UK as a result.

So, do differing tax regimes in neighbouring countries really lead to mass movements of people? I'm not sure that there is any real evidence to back up such an assertion. Denmark has a top rate of 58%, whilst neighbouring Germany only goes as high as 45%, but Denmark doesn't seem to have been depopulated as a result. Some of the latest countries to join the EU have very low top rates of tax, but there's been no huge movement of people from higher tax areas to lower tax areas.

It might be argued that the question of migration based on tax rates doesn't apply to all of us, merely to the highest earners, and that they take their wealth-creating skills with them. Again, where is the evidence for this? I'm sure that someone can point to one or two high profile cases, but there really is no evidence that a difference in tax regimes causes significant levels of migration.

In reality, people decide to either stay put or migrate elsewhere for a variety of reasons; and economic advantage is but one of those. And even economic advantage is assessed by reference to a range of factors, of which income tax rates are simply one. There is nothing wrong per se with different countries, even neighbouring countries, having different tax regimes, including different rates of income tax, as long as the overall economic conditions are conducive to the sorts of businesses and economic activities which we want.

I wouldn't suggest that that's a balance which it is easy to achieve; but the bogeyman of people leaving is often more a way by which opponents of a more redistributive tax regime seek to defend the position of the few, rather than being a real problem.

8 comments:

Anonymous said...

good rebuttal John,

Labour and their supporters are reading into this what they need to surprise surprise, especially after Gerald Holtham proved them wrong on the unfairness of the Barnett formula they have long championed and are unwilling to reform.

But what isn't Plaid Cymru rebutting the stories when the majority of the media have fallen for the Labour line hook line and sinker.

Alun Williams said...

Dead right. There's a great article expanding on the point here: http://www.monbiot.com/archives/2010/02/22/bleak-havens/

Anonymous said...

Plaid need to develop taxation policies based on Land Value Tax. The common index between all successful and fair societies is a strong element of LVT.

http://www.landvaluetax.org/

macsen

Jeff Jones said...

The difference John is that Danes do feel that they are different from Germans. The analogy with Denamrk is a false one in my opinion for a number of historical reasons. This isn't the case for many people in Wales. As a Nationalist you obviously feel that Wales is very different from England. If you speak Welsh as a first language this is definitely the case. But that is not the world view of most people who live in Wales even if they a few times a year go berserk because of the activities of 15 men wearing a red shirt. The American academic Alfred Zimmern argued before 1914 that there were 3 distinct areas in Wales which he described as American Wales, English Wales and Welsh Wales.In may ways I would argue a similar distinction still exists in the early 21st century. Holtham's analysis was spot on I'm afraid. Although all credit to you as a party in inviting him to your conference.

John Dixon said...

Jeff,

The point about the strength of the feeling of 'difference' is a fair one, and I accept that not all people in Wales see the difference as being a large one. I don't think, though, that my argument really depended on that feeling of difference in the first place.

The question that I was dealing with is the idea that a single change to a single element of the taxation system would lead to those feeling disadvantaged by that change leaving in significant numbers. I see no evidence anywhere to back up that assertion. The Denmark analogy was not a perfect one, for reasons which you've highlighted. I could perhaps have referred to Belgium, where the degree of 'difference' between the Walloons and the French, or between the Flemings and the Dutch, might be considered to be smaller, although that's still not a perfect analogy either.

A better analogy would be migration between the Lande of Germany, or the states of the USA. I haven't been able to locate any firm data; but I'm not aware of any reports of significant migration based solely on tax rates.

So, I don't think I can adduce any hard evidence that will convince you that the original assertion by Gerry Holtham was wrong; but neither, as far as I can see, is there any hard evidence to back up the assertion (unless, of course, you know better!). I'm not sure that an assertion of that nature without supporting evidence adds a great deal to debate. And there is surely a sense in which the onus is on those who introduce such an assertion to prove it, rather than on others to disprove it?

Incidentally, MH at Syniadau has another take on the same issue.

Jeff Jones said...

John I remember reading years ago an article that different tax rates in the States had an effect on the movement of very rich people. This might be the example that Holtham was thinking about. Although given modern mobility with Philip Green living in Monte carlo and flying into London on a Monday I often think that the super rich often protest too much about tax rates driving them out of the UK. I thought that in general Holtham's comments were very honest. In my opinion given the Calman report and the comments of both Jim Murphy and even David Cameron the debate has moved on from merely changing the Barnett formula. If there is movement in the next few years then it will now probably include some tax raising and borrowing powers for the devolved administrations. It might even bring more mature and accountable politics to both Wales and Scotland.

John Dixon said...

Jeff,

I suspect that any substance in the idea of people moving around to avoid tax revolves around the bit about the 'very rich'. And I'd accept that people in that category will frequently go to great lengths to avoid paying a fair level of tax, depite their obvious ability to pay up. For some of them, it seems almost to be an issue of principle that they should not be expected to pay tax.

I'm really not sure that that can be extended to the sort of people that we're looking at in Wales, though, coming back to the original scope of the discussion. But if you ever come across the article again, I'd certainly be more than happy for you to point me at it.

More importantly, I agree with your assessment that some tax-raising and borrowing powers are on the way for the devolved administrations. And I agree as well that that might help to bring a more mature and accountable style of politics. It's nice that we can agree about some things!

Welsh Left said...

"Plaid need to develop taxation policies based on Land Value Tax. The common index between all successful and fair societies is a strong element of LVT.

http://www.landvaluetax.org/

macsen"

The Scottish Socialist Party made that very point in the debate on Local Income Tax during the 03-07 Scottish Parliament term.