Tax and migration

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This story on ClickonWales yesterday did not provide a link to the report which formed the basis for it.  But it looks to me like the same report that I posted on last October.  And the detail is replete with all the occurrences of ‘may’, ‘could’, and ‘might’ that I noted at the time, all of which make it very non-robust as a basis for taking decisions on taxation.

One of the basic premises is that we can extrapolate the tendency of a difference in council tax rates to cause people to migrate between council areas to deduce the likely tendency of people to migrate between areas where different income tax regimes operate.  It requires some complex calculations about the differential impact of different taxes on a household, but in principle that premise seems to me to be reasonable.  However, it clearly requires a good understanding of the extent to which people move between council areas in response to different rates of council tax.  And their conclusions on that point seem to me to be a good deal less robust.

As I understand the methodology here, they’ve analysed large numbers of movements between different council areas, attempted to eliminate those which are due to other reasons which can be identified, and attributed the net remaining migration to the difference in council tax.  Have I oversimplified?  Yes, of course – but I believe that I’ve captured the essence of the approach.  For the purposes of academic research, it’s an entirely valid approach; without asking people why they chose to move, the reasons for that behaviour can only be deduced.  The problem is that such an approach does not provide hard evidence that all that migration was actually driven by council tax differentials.  I’d go further – it doesn’t provide hard evidence that any of the migration was actually driven by tax differentials.

Much of theoretical economics seems to be based on an assumption that human decisions are driven first and foremost by the perceived economic interests of those making them; that man is essentially an economic animal.  For the purposes of analysis and academic research, it’s a reasonable starting point, and it can produce some interesting results and hypotheses.  But one of the reasons why theoretical economics does not always accurately predict what actual people will do is that real living people take decisions based on a whole range of factors, not all of which are down to money.

I wouldn’t argue that ‘nobody’ will ever decide where to live based on the taxation regimes in operation.  Quite the reverse; we know that some very wealthy people choose to live in tax havens in order to maximise their own wealth.  But I suspect that the number is much more limited than a simple – or even a complex – economic model would predict.  One of the reasons for that is that single tax changes rarely apply in isolation; another is that what you get for your taxation varies as well.  So, whilst a lower income tax regime might attract some, a higher council tax regime in the same place, or a lower level of services supplied because of the lower tax revenues of the government, might offset that.

No doubt some will respond along the lines of, “yes, but what about the Laffer curve” under which there comes a point where higher taxes become counter-productive and generate lower rather than higher revenue as the higher taxed seek ways to avoid paying their taxes.  The problem is that although the theory is clear and makes intuitive sense, hard evidence that it applies in practice is much harder to come by.  Academic theory isn’t always backed up by the actual behaviour of real people – some of the reasons for that have been touched on above.

The problem isn’t with the research and analysis itself; it’s useful and interesting in its own right.  No, the problem is when people attempt to use this sort of research as a justification for a particular tax regime which just happens to match their own ideological perspective.  In this case, it’s already been used by the Tories to justify their own predilection for low taxes.  And the article on ClickonWales sought to use it to justify opposition to further tax devolution.

There’s nothing wrong with arguing for low taxes as such, or even for a common taxation regime across different jurisdictions (although I wouldn’t agree); the problem comes when people start to argue that they don’t need to cut spending to pay for lower taxes because lower taxes will actually increase rather than reduce government revenue, or that differentials in tax rates will directly lead to migration, because the evidence offered in support of those positions is theoretical rather than based on hard facts.  We should always be wary of anyone offering us what looks like a free lunch.  And tax cuts with no matching spending cuts look a lot like a free lunch to me.