David Cameron's Tax Lesson
A 50% tax rate yields less revenue than advertised
WSJ Editorial, February 23, 2012
Speaking of higher taxes (and President Obama always does), there's news from once fair Britannia.
Preliminary figures out this week show that Britain's 50% top marginal income-tax rate may have reduced tax revenue from top earners by as much as 5%, compared to the old 40% top rate. Tax revenue from those filing self-assessments due January 31 was down some £500 million versus last year.
So here's a puzzle for Prime Minister David Cameron: Is this an example of fairness—or another predictable policy own-goal?
The U.K. tax year runs from April to April, and self-assessments, together with any tax due, must be turned in by the following January. So this January's numbers are a first look at the effect of the 50% tax rate, put in place by the previous Labour government in its last days and kept there by the Tory-Liberal Democrat coalition headed by Mr. Cameron.
That tax hike was the first increase in the top marginal rate in Britain (which kicks in at £150,000 a year) since then-Chancellor Nigel Lawson cut it to 40% from 60% in the late 1980s. The argument for the higher tax is that "rich bankers" are responsible for the economic crisis and should pay for the clean up. Or, as Mr. Cameron likes to put it, those with the "broadest shoulders" should bear the heaviest burden.
What this week's numbers teach, however, is that Britain's richest taxpayers are simply shifting their incomes, or themselves, offshore, or deferring income, or otherwise arranging their affairs to avoid the confiscatory new top tax rate. Maybe that's unfair, too—the rich are usually better at protecting their assets—but it's the predictable consequence of a tax rate whose animating purposes are envy and spite.
There's a lesson here for the Obama Administration, not that it is likely to heed it any more than Mr. Cameron.