There is an ongoing debate about the 50p tax rate in the United Kingdom; a lot of nonsense is spoken from the left and some nonsense from the right. I wanted to outline my own view about this issue and also stress the important differences between the UK and the US. In my view, Obama's proposals should be approached in a slightly different way than the 50p tax rate in the UK.
The following issues are important regarding the 50p tax rate:
1)Time-bomb issue. Since the time when Blair became the leader of Labour Party, there was virtually a consensus about the top rate of income tax. Even paddy Ashdown's 1p was, frankly, quite a minor adjustment suggestion. However, the decision to introduce the 50p tax rate was one of those asymmetrical decisions which is easier to introduce than to repel. For over 20(!) years, Britain lived with a 40p top rate of income tax, and somehow everybody was OK with it. Now the very same people are defending the 50p rate. A bit hypocritical, isn't it?
2)Motivation. I myself am a supporter of progressive taxation. However, there are two completely different justifications for it. The first, perfectly acceptable, is that a progressive tax rate is a fair way to raise revenue. The marginal utility of money is diminishing, and from a utilitarian point of view, the total welfare is maximized under a progressive tax rate. The second motivation is taxing the rich for the sake of it, i.e. social engineering. This is why I think that Osborne's approach to it (let's see if it raises any money) is roughly right, but Clegg's (if it does not raise revenue, let's find some other tax to levy on those rich bastards) is misguided.
3)Mobile workforce. Whether we like it or not, UK has a much more mobile workforce than Continental Europe. Financial services industry is the same across the world, and rich bankers can simply move to a country with lower taxes. sad but true.
4)How is it spent? Warren Buffet calls for higher taxes, and so are some European businessmen. Why not British? One might say that UK does not have a proper business elite, that most of the rich people in UK are either wealthy immigrants or 'reckless' bankers. This is partly true, and I wanted to write a separate post about it. But let's be fair - a person on 150000 pounds a year is not a super-rich person, that's upper middle class. Most of these people are very hard-working, they work long hours and sometimes even commute long distances. They pay huge taxes - what are they spent on? Equality officers, council houses for non-working immigrants with seven children, public sector pensions (the kind which is unimaginable for these people) etc.
In other words, some people simply cannot understand why they must pay those huge amounts of money.
In addition to this, Britain is different from Sweden. In Sweden, you pay taxes, but get a school voucher and a great degree of choice and competition among the state healthcare providers. In UK, anyone who can remotely afford it puts their children into private schools and join BUPA or other private health insurance provider. So - less value for money, you don't get much for your taxes.
5) Why is US different? because the top rate of federal income tax in US is 35%, not to mention a bunch of tax credits and exemptions. It should however be said that Obama could do better by suggesting the abolition of some of the exemptions - not that the Republicans would let him, of course.
6)So what should we do? I think the 50p tax rate needs to be phased out by cutting it by 1% every year and increasing the threshold faster than inflation. It will be an important signal and improve expectations, but revenue would not be lost as quickly. After all, in 1979, the top rate was cut from 83% to 60%, and the further cut to 40% took place only in 1988. But everyone knew that Howe and then Lawson were committed to cutting taxation, so it did not matter that much that the tax was deferred.
of course, i would prefer Osborne to firmly promise that '50p tax rate will be abolished when the fiscal situation permits'. Unfortunately, the left-wing encroachments from the LibDems make such an announcement unlikely in the nearest future.
The following issues are important regarding the 50p tax rate:
1)Time-bomb issue. Since the time when Blair became the leader of Labour Party, there was virtually a consensus about the top rate of income tax. Even paddy Ashdown's 1p was, frankly, quite a minor adjustment suggestion. However, the decision to introduce the 50p tax rate was one of those asymmetrical decisions which is easier to introduce than to repel. For over 20(!) years, Britain lived with a 40p top rate of income tax, and somehow everybody was OK with it. Now the very same people are defending the 50p rate. A bit hypocritical, isn't it?
2)Motivation. I myself am a supporter of progressive taxation. However, there are two completely different justifications for it. The first, perfectly acceptable, is that a progressive tax rate is a fair way to raise revenue. The marginal utility of money is diminishing, and from a utilitarian point of view, the total welfare is maximized under a progressive tax rate. The second motivation is taxing the rich for the sake of it, i.e. social engineering. This is why I think that Osborne's approach to it (let's see if it raises any money) is roughly right, but Clegg's (if it does not raise revenue, let's find some other tax to levy on those rich bastards) is misguided.
3)Mobile workforce. Whether we like it or not, UK has a much more mobile workforce than Continental Europe. Financial services industry is the same across the world, and rich bankers can simply move to a country with lower taxes. sad but true.
4)How is it spent? Warren Buffet calls for higher taxes, and so are some European businessmen. Why not British? One might say that UK does not have a proper business elite, that most of the rich people in UK are either wealthy immigrants or 'reckless' bankers. This is partly true, and I wanted to write a separate post about it. But let's be fair - a person on 150000 pounds a year is not a super-rich person, that's upper middle class. Most of these people are very hard-working, they work long hours and sometimes even commute long distances. They pay huge taxes - what are they spent on? Equality officers, council houses for non-working immigrants with seven children, public sector pensions (the kind which is unimaginable for these people) etc.
In other words, some people simply cannot understand why they must pay those huge amounts of money.
In addition to this, Britain is different from Sweden. In Sweden, you pay taxes, but get a school voucher and a great degree of choice and competition among the state healthcare providers. In UK, anyone who can remotely afford it puts their children into private schools and join BUPA or other private health insurance provider. So - less value for money, you don't get much for your taxes.
5) Why is US different? because the top rate of federal income tax in US is 35%, not to mention a bunch of tax credits and exemptions. It should however be said that Obama could do better by suggesting the abolition of some of the exemptions - not that the Republicans would let him, of course.
6)So what should we do? I think the 50p tax rate needs to be phased out by cutting it by 1% every year and increasing the threshold faster than inflation. It will be an important signal and improve expectations, but revenue would not be lost as quickly. After all, in 1979, the top rate was cut from 83% to 60%, and the further cut to 40% took place only in 1988. But everyone knew that Howe and then Lawson were committed to cutting taxation, so it did not matter that much that the tax was deferred.
of course, i would prefer Osborne to firmly promise that '50p tax rate will be abolished when the fiscal situation permits'. Unfortunately, the left-wing encroachments from the LibDems make such an announcement unlikely in the nearest future.
No comments:
Post a Comment