High tax Britain

The government says that the forthcoming budget is going to be all about growth. And rightly so: the economy is still in the doldrums, and without much stronger growth than we are currently witnessing, the coalition has no hope whatsoever of balancing the budget by 2015. But few of the measures being trailed in advance are likely to have much effect, so long as Britain is stuck with a highly uncompetitive tax regime.

International tax surveys highlight just how bad our comparative situation has become. According to KPMG, out of the 86 largest economies in the world, we now have the fourth highest top rate of tax. Even more striking is research from accountancy association BKR International, which calculated how much money high earners are left with after tax in the various G20 countries. In the UK, they get to keep just 41 percent of their earnings. That compares with 67 percent in France. So much for national stereotypes!

In light of this, it is little wonder that so many high earners are thinking of packing their bags and moving elsewhere. According to a Policy Exchange/YouGov poll published in December 2010, 43 percent of financial services professionals are considering leaving the UK. 11 percent are definitely departing or likely to do so. Looking specifically at hedge funds, if the current rate of departure continues, 20-25 percent of them will move offshore in the next two or three years, taking £1-1.5bn of tax revenue with them. It doesn’t paint a pretty picture.

Yet according to the modelling contained in the Adam Smith Institute’s latest research – The Revenue and Growth Effects of Britain’s High Personal Taxes – this could be just the tip of the iceberg. Based on extrapolations of government data and various surveys, Peter Young and Miles Saltiel, the report’s authors, suggest that Britain’s tax regime could actually cost it more than £350bn in lost revenue over the next decade, by forcing economic activity outside the UK, by reducing the incentives for entrepreneurs to create wealth, and by contributing to 10 years of flat growth.

Even John Maynard Keynes – hardly the poster child of the free market movement – was well aware of the deleterious effect of high taxes, writing in 1933, “Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget.” And that seems to be the situation we find ourselves in now – taxes are high enough that any short run boost to revenue is outweighed by the long run harm that is being done to our growth prospects.

The politically motivated introduction of the 50p tax rate probably marked the tipping point, and George Osborne should be bold and scrap it in his budget speech. But it will take more than that to convince internationally mobile wealth-creators that Britain is really open for their business. We should also be removing the revenue-losing non-dom charge, cutting capital gains tax, and setting out a clear intention to make significant reductions to the 40p tax rate over time.

What Britain needs to do is couple a smaller, more efficient public sector with a dynamic, enterprise economy. This should be the coalition government’s guiding mission. And a few well-directed, pro-growth tax cuts would be a good start.

Published on Spectator CoffeeHouse here.

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