The Adam Smith Institute urges tax cuts to raise more revenue

Peter Young is fiscal policy adviser to the Adam Smith Institute.

The UK has become one of the highest taxed countries in the world. Our competitiveness has suffered and economic growth is being stifled. In a comparison of top personal tax rates in the 86 largest economies, Britain languishes at number 83.Today even France can be considered as a tax haven relative to the UK.

High UK incomes taxes will raise less revenue not more.  The evidence from other countries as well as Britain in the 1980s is clear.  Our report, The Revenue and Growth Effects of Britain’s High Personal Taxes, cites sixteen specific examples from seven separate countries to demonstrate that, when high tax rates go down, public revenues go up.

Some people seem to think, for reasons that are unclear, that this time the experience in Britain will be different.  But that is implausible.  “There is no science behind it. It's simply my judgment that I thought that figure was an appropriate one,” Alastair Darling said, in a notable abandonment of evidence-based policy-making, when he introduced the 50% rate.

But must we wait another two years until the figures from HMRC show that indeed revenues have gone down?  The economic damage caused in the meantime would be immense. It is clear that business leaders are now extremely  hostile to the UK tax system, personal taxes in particular, and this is affecting both the investment decisions of companies and the location decisions of individuals. There is already significant emigration from the UK finance industry, much of which is highly mobile.

Our report sets out a model which seeks to arrive at an earlier conclusion.  It is based on extrapolations of data from HMRC, ONS, other government departments, guided by ASI surveys of tax advisers and accountants and those done by other organisations, e.g. the YouGov/Policy Exchange survey of city professionals, and backed by evidence of what is already occurring, e.g. an exodus of higher earners in the city that already accounts for an identifiable £1bn - £15bn of lost revenues. Our report pulls together the impact on indirect and direct tax receipts, as well the wider effects on the economy and their knock-on revenue implications.

Our model shows that if taxpayers’ responses to the new rates are relatively limited, the ten year effect of the change in tax rates is estimated to be public revenues forgone of approximately £350bn, after netting out the additional receipts from taxes, or approximately £430bn gross. If taxpayers’ responses are relatively far-reaching, the ten year effect of the change in tax rates is estimated to be approximately £640bn of net receipts forgone, or approximately £700bn gross. These are large numbers. The effect on growth is also large. If taxpayers’ responses to the new rates are relatively limited, we estimate that economic activity is set to fall by some 20% over a ten year period  below the estimated level without the 50p tax rate.

The Chancellor should seize the occasion of the 2011 budget to reverse this disastrous policy promptly, for the benefit of public revenues, economic growth, the government’s standing with domestic wealth-creators, and the UK’s reputation with world business. Specifically, he should: eliminate the additional 50% rate of tax and the revenue-losing £30,000 non-dom charge immediately; reduce the higher rate of income tax from 40% to 35% and announce an intention of further reductions over time; reinstate the personal allowance that is currently phased out between £100,000 and £115,000; and reduce the level of capital gains tax from 28% to 18% or below. That would really promote growth, as well as raising more revenues.