Economics is used to cajole, persuade or alter the behaviour of other economic agents, firms, consumers and governments, and this item on The BBC website highlights this point succinctly.

“Twenty leading economists have written to the Financial Times saying the 50p tax rate paid by high earners is doing “lasting damage” to the UK economy.” It may be dismissed as part of a PR campaign, but one of the aims is to alter the UK’s income tax regime. The 50p tax band might be simple to compute, but does it actually raise enough revenue for George Osborne, the Chancellor of The Exchequer?

This piece might be used to revisit Adam Smith’s Cannons of Taxation.

1. First, people ought to contribute, as far as possible, in proportion to the income that they derive under the protection of the state.
2. Second, taxes ought to be certain, and not arbitrary. The time and manner of payment should be clear to everyone.
3. Third, taxes should be levied at a convenient time. Taxes on rents or houses, for example, should be payable when rents are paid. Taxes on consumable goods are convenient too, because they are paid little by little, as goods are bought.
4. Fourth, taxes should cost no more than necessary. They should not require a great number of expensive officers to collect. They should not discourage industry nor destroy capital. 

There is scope to consider The Laffer curve, Does a higher marginal income tax rate add to government revenues or not? Income tax rates pre 1979, for higher earners on paper were in excess of 80%, and this quote from the actor Michael Caine is worth a second glance.

“I left for eight years when tax was put up to 82 per cent. The newspapers said: “Michael Caine’s leaving: let him go, the stupid, overpaid, loudmouth idiot, who cares where he goes?” Well, you didn’t get 82 per cent tax from me for eight years and a quarter of a billion dollars worth of movies were outside this country instead of inside it. Now, that is just one stupid, loudmouth moronic actor. Imagine what happens with companies that disappear.”

Caine’s point is summed up by Deanne Julius. The former MPC member said there was already evidence of a negative impact on the economy from the high tax rate.“It’s not going to raise very much money and at the same time it is a kind of signal to the entrepreneurs, and the people who invest in this country, that actually they’re going to be penalised for that investment,” she told BBC Radio 4’s Today programme. “What we have now is a series of individual cases, anecdotal evidence, the fact that many of the hedge funds have already moved to Switzerland. “And certainly what we’ve seen, not just in this country historically but in other countries as well, is that by raising marginal rates on a small number of highly mobile people you end up not collecting the tax that you’d hoped to.” This link to Channel4News’ Fact Check implies that the motivation for the 50 pence tax rate is more political than economic.

Professor Michael Ben-Gad of City University during a TV interview today, claimed the 50p tax rate in the UK was counter productive, raised no extra revenue and “punishes people”. He was one of the 20 economists who had writen to the Financial Times encouraging The Chancellor of The Exchequer to scrap the 50p tax rate, which had been introduced by the Labour Government.

On the other hand, in France, L’Oréal heiress Liliane Bettencourt, has signed a petition to pay more tax following the example of US billionaire Warren Buffett’s call for additional voluntary income tax contributions from the super rich, which hit the news headlines. Has he anticipated changes to the US’s income tax regime?

“In 1992 the top 400 American earners had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that amount, he wrote. In 2008, while the aggregate income of the highest 400 had soared to $90.9 billion, the rate paid had fallen to 21.5 percent.”

Given that the UK and US economies growth rates are anaemic, and that monetary policy options are almost exhausted, tax cuts might be on the agenda to stimulate the macro economy, but does it clash with notions of equity?  Students could also consider whether flat rate income taxes are a viable alternative to the present UK system. This tax story also provides an opportunity to explore the difference between income and wealth and methods of levying taxes on individuals and firms.

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