Daniel Mitchell had a spot-on piece over at Cato, showcasing the punitive effects of raising income tax rates too high in England. The lower-than-expected revenue receipts have stymied certain politicians and economists — those who don’t understand or believe in the Laffer Curve.
The documented results of higher-tax policy will also be seen in the United States should the Bush tax cuts expire and government spending continue unrestrained. Below is the summary of England’s money debacle:
let’s now take a closer look at David Cameron’s tax increases. They’ve been in place for a while, so we can look at some real-world data. Allister Heath of City AM has the details.
Something very worrying is happening to the UK’s public finances. Income tax and capital gains tax receipts fell by 7.3 per cent in May compared with a year ago, according to official figures. Over the first two months of the fiscal year, they are down by 0.5 per cent. This is merely the confirmation of a hugely important but largely overlooked trend: income and capital gains tax (CGT) receipts were stagnant in 2011-12, edging up by just £414m to £151.7bn, from £151.3bn, a rise of under 0.3 per cent. By contrast, overall tax receipts rose 3.9 per cent.
Is this because the United Kingdom is cutting tax rates? Nope. As we mentioned in the introduction, Cameron is doing just the opposite.
…overall taxes on labour and capital have been hiked: the 50p tax was introduced from April 2010 (and will fall to a still high 45p in April 2013), those earning above £150,000 have lost their personal allowance, CGT has risen to 28 per cent, many workers have been dragged into higher tax thresholds, and so on. In theory, if one were to believe the traditional static model of tax, beloved of establishment economists, this should have meant higher receipts, not lower revenues.
So what’s the problem? Well, it seems that there’s thing called the Laffer Curve.
…there is a revenue-maximising rate of tax – and that if you set rates too high, you raise less because people work less, find ways of avoiding tax or quit the country. The world isn’t static, it is dynamic; people respond to tax rates, just as they respond to other prices. Laffer told a gathering at the Institute of Economic Affairs that this is definitely true in the UK today – and the struggling tax take revealed in the official numbers suggest that he is right. Tax rates and levels are so high as to be counterproductive: slashing capital gains tax would undoubtedly increase its yield, for example. Many self-employed workers are delaying incomes as much as possible until the new, lower top rate of tax kicks in.
Allister’s column also makes the critical point that not all taxes are created equal.
…higher VAT is also damaging growth, though it is still yielding more. Some taxes can still raise more – but try doing that with income tax, CGT or corporation tax and the result is now clearly counter-productive. These taxes are maxed out; they have been pushed beyond their ability to raise revenues.
Last but not least, he makes an essential point about the role of bad spending policy.
The problem is that spending is too high – central government current expenditure is up by 3.7 per cent year on year in April-May – not that taxes are too low. The result is that the April-May budget deficit reached £30.7bn, some £6.2bn higher than a year ago.
While imposing higher taxes on the “wealthy”, “millionaires and billionaires” or “top 2%” makes for good presidential election season rhetoric in the US, England has proven the folly of such policy. Additionally, government spending must be reigned in, not expanded with more “programs”.
Why take additional money from those taxpayers who have been able to create wealth and employment successfully and give it to the government and politicians who have proven their ability to mismanage and squander income?