Wednesday, 21 March 2012

Why 50% tax is good for the economy

Let’s say you’re an executive who decides s/he wants to trouser an extra £60K.  We’ll assume that if this is taxed at 50% rather than 40, you will emigrate or withdraw your labour or something.*  Bear with me. )

So, you want an extra £60K, and you’re obviously desirable, otherwise they’d already have got shot of you.  So, under a 40% marginal tax rate, you’ll ask for and get £100,000 – 60 to you, 40 to the government.  Under 50% marginal, you ask for and get £120,000 – 60-60.    Either way, you get your £60K.

Here’s the good bit.  Your company is desperate to retain your services, as I said, and is happy to give you your £60K, but they have to raise the extra £20K to fund your extra income tax.  They could just put up their prices, but that doesn’t really work, because some smart competitor will come along and squeeze them out.  The best way is, in short, to sell more of their stuff, which is what they’re employing you for in the first place – which means economic expansion, which is what everybody wants, isn’t it?

I can’t see anything wrong with this, in fact up to a point, the higher the marginal tax rate, the greater the incentive towards increased economic activity.  There might be an inflation niggle somewhere down the line, but that’s the least of our worries at the moment.  I can’t imagine why the Chancellor hasn’t gone for it, can you?

The alternative trick, which I tweeted last week and which was hinted at on The Moral Maze this evening, is to make the 50% rate voluntary.  Shame the bastards into coughing up.  It might just work, self-esteem is a valuable commodity.

* So far, so unrealistic – what productive, motivated useful person would uproot and relocate, or turn into a couch spud, for the lack of £10,000, which is what it comes down to?  Multiply the numbers up and your case weakens, due to the economic law of marginal utility, which I wouldn’t dream of boring you with even if I could remember it. 


  1. To justify the uselessness of the 50% rate Georgie boy refers us to the OBR (Office of Buck-passing Responsibility). Here's a bit of what they say on the specific matter:
    There is also reason to believe that the behavioural response to the cut in the tax rate may be smaller than to the increase, because of the costs involved in swiftly reversing expensive decisions on retirement, migration, tax planning and evasion. But it is very important to emphasise the significant uncertainties around all such estimates.

  2. Publishing how much everyone pays in tax might have an effect on those who resent paying it at all and use all possible tax avoidance schemes.

  3. Are there any tax avoidance schemes? I've just been told I'm paying tax on my pension and I'd like to avoid it.

  4. A friend has pointed out the flaw, which is that they have no moral compass and therefore can't even discern their own best interest beyond the balance sheet. Joseph Heller nails it in 'Good As Gold' when after a dialogue around this area he has Gold ask "But what about love?", and Sid shakes his head and replies "It can't buy you money."

  5. I pay tax in both France and UK and I'm very happy that some small portion of it goes however indirectly towards the pensions, attendance and winter fuel allowances of some of my fellow commenters. And I'm very grateful that some small portion of your tax payments go however indirectly towards allowing me to sit about in the sun and think beautiful moral thoughts. Thank you, one and all. Can I buy you a drink?