Thursday 8 September 2011

Where's the evidence?

The call by a number of leading economists for the 50p top rate of tax to be scrapped is nothing new.  Nor are the dire warnings about lack of competitiveness if we don’t reduce tax rates for the most highly paid.  But where is the evidence in support of that proposition?
Chris Dillow blogged yesterday on the same question, and provided a good rebuttal of the basic claims.  In truth, there is no real evidence that the marginal rate of tax on the highest paid has any real influence on where people live or on where they set up businesses.
Economists sometimes seem to assume that we will all behave according to their models of what motivates us, and will all be continuously seeking marginal economic advantage.  In reality, we are much more complex than that, and decisions depend not just on one single factor, but on a range of issues.
The question we need to address in rebuilding the economy is not whether a particular tax rate is or is not a disincentive, but the overall certainty of a reasonable return on investment, whether of money or of labour.  And that return is not measured simply in financial terms.
At heart, the call for a reduction in the top rate of income tax isn’t about economics pure and simple; it’s about an ideological interpretation of economics, in which inequalities of income are seen as an inherently good thing, based on the assumption that acquisitiveness is the prime human motivation.
It really isn’t the only possible model for human behaviour.


Boncath said...

Clarity would help
The phrase much loved by supermarkets Buy one get one free conceals a simple fact that you end up buying two with no financial gain other than that gained by the seller

It is said that only 350,00 people actually pay tax at the 50% rate when their total taxable earnings enter this tax band
I suspect that the total revenue gained here is marginal in the total tax take of this Government
We have had endlees spin on the National Debt but an awe inspiring silence on what has happened to it since the Election - is this another smoke screen

John Dixon said...


Certainly it's true that the higher we set the salary level at which a higher rate of tax comes into effect, the lower the number of people who end up paying it. But the extent to which revenue from a particular tax is 'marginal' isn't really a good argument for or against that tax; there are other taxes from which the total revenue is not enormous in the grand scheme of things either.

It boils down to a question of 'fairness' - or rather, one's perception of fairness, since there's no absolute basis for deciding what is or is not fair. Certainly, those on the high salaries will pay a higher marginal rate of tax, and I happen to agree with that. (Although some of the highest marginal rates of 'tax', if you interpret that in a very wide sense, are paid by those moving from welfare to work.)

It's no surprise that those lobbying hardest for a reduction in the taxes paid by the most well-off are often those who will be paying them.

Unknown said...

I am amazed that these people have the cheek to propose this tax reduction on purely Capitalist doctrinaire grounds, when capitalism has failed spectacularly, and only still exists because of state intervention (which is very much against the rules of the free market). They should at least have the sensitivity to desist from this special pleading on behalf of the rich at lest until we are out of the recession.

And john - you are right to suggest that we should move to evidence based policies. Kenysanism is the only economic policy which has proven to be effective in times of recession, yet the Tory Junta turns its face against it for ideological reasons.