Defending 50p

Alan Johnson seems not to be keen on the 50p top tax rate. So, how should the left defend it? Here are some lines of argument.
1. There are income effects as well as substitution effects. Yes, higher taxes, ceteris paribus, make work expensive relative to leisure (or working overseas) and so, at the margin, people might choose to work less or emigrate. However, in reducing our net income, higher taxes also make us work harder as we try to achieve our target level of wealth.
If it weren’t for having to pay taxes, I’d have been able to retire years ago. So for me, taxes increase labour supply. And I’m not alone. There’s evidence that, for a group of people who can choose their working hours, labour supply can fall in response to higher incomes.
Given these competing effects, the evidence for an effect of taxes upon labour supply is quite uncertain.
2. People work and live in the UK for non-financial motives: job satisfaction, ego gratification, whatever. This is why so many of the rich carry on even when they have made millions. This suggests that the margin at which higher taxes deter work might be quite a narrow one.
3. Taxes don’t just deter productive, entrepreneurial activity. They can also deter rent-seeking. Why waste time and effort in office politics or in lobbying government for favours if the post-tax returns from doing so are low?
There’s one area where this is especially relevant - banking. Fraser Nelson points out that, after the top tax rate was cut to 40%, the share of tax paid by top earners rose.  Let’s concede - massively - that there’s causality here, and that lower top taxes encouraged a boom in the financial sector. This boom, though, occurred only because of an unpriced externality; bankers got rich by getting the rest of us to pay for the risk pollution they created. Insofar as higher taxes deter such activity, they serve as a proxy Pigou tax, helping to internalize an externality.
4. It is jobs that are productive, not people. Imagine that Wayne Rooney were to take umbrage at paying 50% tax, and move to Real Madrid. Sir Alex would then buy a replacement, who would pay tax. The net loss to the Treasury wouldn’t be Rooney’s tax, but the difference in tax paid by Rooney and his successor. This would be small.
I suspect then, that the right’s view that higher taxes deter genuinely productive entrepreneurs is another example of “small truth, big error” rhetoric - it’s true, but it’s only a fraction of the story, and mybe not the biggest fraction.

Comments

[Niklas Smith]

On point 4: surely a thicker tax wedge reduces the number of jobs? If you raise VAT on goods, you would expect fewer goods to be sold. Does the same logic apply in the jobs market or are there special reasons why it shouldn´t?

That said, your reminder about income effects is important and probably a big explanation for why high tax rates (and 50% is by any objective criteria a high tax rate) do not necessarily have such dreadful effects as some people predict. After all, Sweden has survived despite a top tax rate of about 55% (assuming an average rate of local income tax). Although the abolition of inheritance and wealth taxes may have mollified the plutocracy in Sweden's case :)

[Stuart]

Can't agree with Point 4 at all. Jobs are a cost and people are productive in, and out, of work.

Rooney plays for Man U because he is one of the 250 best footballers in the World out of a population of tens of millions. There is no way that a jobbing Premiership footballer (think Emile Heskey) would be worth, and therefore, paid anything like as much. So much less tax gets paid.

[Anonymous1]

I have to disagree with number 4.
The same position can be filled by people whose productivity can differ dramatically. And it's generally in high flying jobs where the productivity difference between the most and least skilled is at its biggest - that's why the big salaries & bonuses).

To use your example - if Rooney leaves and they hire someone less productive, scoring less, Man Utd (aka the business) will suffer in the long run. They might not win trophies, revenues will drop.
In the long run, this will affect the revenues the treasury will be able to extract from them.
So Man Utd is highly interested in paying for high productivity.
I agree that from the treasury's point of view, the problem might be as simplistic as you describe it - and it might work as long as businesses do well, which is difficult without top talent.

[Fraser Nelson]

Chris, do you know of any independent study suggesting the 50p tax will raise revenue? Seriously, if anyone does then you will. I wasnt able to find them - and I found 36 examples of countries lowering their top rate of tax in order to collect more revenue. Are they all wrong? Is it only the UK, Iceland and Greece that are correct that taxes * at this level * raise revenue? And two hedge fund managers between them cost the Exchequer £200m a year in lost tax according to the FT - where is the Alex Ferguson figure who's going to replace them? The guys buggering off are the tiny top 0.1% who will probably pay 10% of all income tax. Without them, we're all worse off - even the poor.

[chris]

@ Fraser - I don't have such studies; the ones I link to are inconclusive on this.
The KPMG report you link to gives us no idea whether those 36 countries actually have raised revenue as a result of their cuts.
There is, though, one tiny clue here. So far this year, income tax receipts are 12.3% up on the same period last year. This is well ahead of the OBR's forecast for a 3.2% rise:
tables PSF6 and C11 here:
http://www.statistics.gov.uk/pdfdir/psf1010.pdf
http://budgetresponsibility.independent.gov.uk/d/junebudget_annexc.pdf
I wouldn't hang much on this either way. But it does suggest that the claim that a 50p tax will swiftly and sharply reduce revenue is one that doesn't jump out of the data.
If I were you, I'd stress the potential long-term adverse effects - that higher taxes increase social norms against working.

[Jim]

The crucial point is this: will it raise more revenue?

If yes, while I wouldn't want to pay it myself, and would do whatever I could to avoid doing so, it's a valid thing to do, especially at the moment when the State needs all the revenue it can get to dig us out of the hole the Labour Party left us in.

If it raises no more, or even reduces the overall take, then its a pure piece of vindictiveness. Its just saying 'I don't like you (those who earn over £100K or whatever) so I'm going to take more tax off you, even though it won't help the nation one bit'. No one gains, but the Left is happy because they've socked it to 'the rich' again. What a lovely attitude to take.

[Keith]

Surely who wins football matches is a matter of luck a lot of the time or why do bookies make profits? One footballer/ investment banker etc is interchangable. Skill arises from good training and practice. They are not limited in theory to those who already have them.

The hole Jim refers to is the cost of the fuck up by his wealthy banker friends not the last bunch of clowns in Downing street.

What about also raiding the tax havens and applying Capital gains to the asset stripping private equity crooks? Plenty of revenue there I dare say.

[Jim]

@Keith: I have no 'wealthy banker friends'. To give you some idea of the circles I move in, last night I was in a Wetherspoons pub, doing their weekly quiz, with a few mates whose jobs are respectively PE teacher, catering manager and carpenter.

I do however recognise that some people get pleasure from depriving others of their money, even when it does no good to anyone whatsoever.

[Guambra Feo]

@Jim, "The crucial point is this: will it raise more revenue?...If it raises no more, or even reduces the overall take, then its a pure piece of vindictiveness."

Even if it reduces the overall take, it might still cause a kind of good you haven't considered. If taxes go up here, then even if it becomes harder to retain talent in the country, by the same token, it reduces the race to the bottom between countries to offer low rates of tax to high earners.

Take those in the financial sector who earn super salaries-plus-bonuses. I'm sure many of them have a genuine flair for their jobs, but it is really just a kind of loophole or fluke that what they are able to do well attracts such high payment. People exhibit talent and flair in many kinds of jobs.

If wages for those positions across the world were universally halved (or - a fortiori - taxed just 5% more highly) very few people working for the finance sector would switch jobs. The opportunity cost to them of remaining in their jobs is simply not very high.

Potentially, bringing in a high tax might be costly to a government but also a necessary bargaining chip to get some international accord on high salaries which are essentially due to a systemic loophole.

So, it is possible that if one considers just the effects of a high tax rate for high incomes within one's own country, it would seem irrational (hence the inclination to look for other motives such as spite or envy). But must we overlook the effects of the policy outside our own borders?

[Jim]

@Guambra Feo: If we retain higher top tax rates in the UK, and lose high tax payers to other countries, the taxpayers in those other countries gain at our expense, whatever tax rates may be in those countries.

I prefer UK tax policy to be set to benefit SOMEONE in the UK, either individuals, or the collective in the form of extra tax revenue. If a policy does neither it is pure vindictiveness.

[Noumenon]

Fascinating twist in #1. And even if that effect was larger than the whole income-deterrent effect, what politician would say "we should pass this tax increase because people will have to work harder to pay the tax"?

[Noumenon]

Fascinating twist in #1. And even if that effect was larger than the whole income-deterrent effect, what politician would say "we should pass this tax increase because people will have to work harder to pay the tax"?

[Guambra Feo]

@Jim

"I prefer UK tax policy to be set to benefit SOMEONE in the UK, either individuals, or the collective in the form of extra tax revenue. If a policy does neither it is pure vindictiveness."

If we are making an independent assessment of the worthiness of a particular tax, is there any good reason why the only possible beneficiaries of the tax are nationals of the country which introduces the tax?

Put the other way, if a low taxation on high earning individuals or corporations has harmful effects on other countries' economies, are we not permitted to use this as a reasom against the tax? (It certainly doesn't seem vindicative to consider the effects of a policy on non-nationals.)

The low taxes brought in by Reagan in the 80s for high salaries undoubtably brought taxes down in other countries keen not to lose their own high earners. Perhaps Ireland's low corporation tax has done a similar job in recent years.

If this is just an ethical point, its hard to see why it should influence politicians who have a mandate to promote the national interest more than anything else. That was why I mentioned higher taxes being used as a bargaining chip for international agreement.

The point is that each country introducing the taxes that bring in more revenue without co-operation will likely result, as has happened, in a race to the bottom with each state trying to woo high-earners with low taxes.

Chris's point about Wayne Rooney is revealing here. Footballer's just aren't as fungible as supposed; if taxes go up here on their salaries, there will probably be genuinely unique talent lost. The opportunity cost of remaining in Man U for Rooney would be high if he can earn just as high a wage taxed less in Spain.

But if taxes were universally much higher for high wages, especially affecting players such as Rooney, he would probably remain a Man U player since that is already the profession choice that maximizes his salary.

This is the same point made regarding financial sector workers.

If their post-tax earnings were half of what they are now in every country, we probably wouldn't lose many of them to other professions or see them taking up golf instead of tapping on their Bloomberg terminals.

But to make any headway on an international agreement, some countries would have to start by setting a high tax at cost to its own revenues as a gesture of goodwill.

These may be somewhat far-fetched thoughts. But the main point stands that assessing whether a tax is desirable or not involves going beyond just whether it will raise more revenue.

[Keith]

To Jim

unless we contrive to abolish the state, there must be taxation. The best form of this is a progressive Income Tax as this is based on ability to pay.

What is vindictive is to cut Housung benefit for millions of very poor and disadvantaged people who suffer a much greater harm than high earners do from Income Tax increases due to the higher marginal value of each unit of Income for those on low Incomes .i.e. cutting necessities from consumption or losing your home
are much greater injuries than a rise in marginal tax for the comftable.

To Guambra Feo,

I contend Labour is substitutable. If some people emigrate to avoid Tax they can be replaced.

[Jim]

@Keith: but that's the point isn't it? The 50p tax may raise zero extra revenue. So there is no extra to allow the benefit cuts to be reversed. The cuts will have to happen, 50p top rate or 40p top rate. The revenue isn't there either way. But with a 50p rate some people will be worse off, for no improvement elsewhere.

And as for 'progressive' income tax being based on the ability to pay, well no it isn't. Flat rate tax is based on the ability to pay (25% of £10K = £2.5K, 10% of £100K = £25K. I earn 10 times you, I pay 10 times the tax). Higher rates for higher earners are redistributive, which may (or may not) be a good thing, but based purely on ability to pay they are not.

And yes the people who emigrate are replaceable. Their income probably isn't.

[Jim]

Edit: that should have been 25% of £100K = £25K of course!

[Alex]

Jim - I would say that somebody on 100k has far greater ability to pay 25% tax than somebody on 10k, partly because there are a lot of fixed costs of living. On that basis, I would say that a progressive income tax can still be based on ability to pay.

[Niklas Smith]

I'm still waiting for an answer to my question (see first comment) about whether we would expect a higher tax on income to reduce the number of jobs available just like higher VAT reduces the number of purchases by consumers.

I don't know the answer myself so I'd like to hear what other people think!

[Jim]

@Alex: so the fact that we give everyone a tax free allowance makes an otherwise flat rate tax OK then? Cos if you're on £10K and get (say) £5K tax free, you'll only pay £1.25K in tax (effective tax rate 12.5%). Whereas Mr £100K pays 25% of £95K = £23.75K (effective tax rate 23.75%).

The poor man pays only just over half what the rich man does, as proportion of his income, and one nineteenth of the tax in cash terms, despite earning a tenth of his income.

That seems remarkably 'progressive' to me.