Pledging to Raise Britain's Marginal Tax Rate Will Not Help

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The United Kingdom's Labour Party recently pledged to lift Britain's top marginal tax rate from 45 per cent to 50 per cent.

The reaction was interesting because it illustrates the way people in politics sometimes talk past one another in political debate.

The policy has been partly framed as a deficit reduction measure and partly as an effort to create a "fairer" economy.

In critiquing the proposals, detractors have focused on the first of these, pointing out that the analysis of Her Majesty's Treasury is that the higher tax rate only accounted for an additional £100 million in tax revenue.

In isolation, that seems like a lot. Given that the UK Budget deficit exceeds £116 billion, however, the proposal would not meaningfully contribute towards putting Britain's public finances in order.

Worse, the Institute for Fiscal Studies says that reintroducing a 50 per cent tax rate could conceivably decrease overall taxation revenues by a small amount.

If this seems counter-intuitive at first, it doesn't take much to see why it could be the case.

The amount of taxable income in an economy fluctuates in response to changes to income tax rates. That's because the generation of income requires the investment of either work or money.

When the rewards of investment are decreased, so is the incentive to invest.

Unless you think you can compel economic activity at gunpoint, people will work less or put their money into safer investments that yield smaller returns.

There are other factors at play, too. In a modern, globalised economy the transnational elite can easily shop around for competing jurisdictions in which to base their economic activity.

Also, a more complicated and progressive taxation regime inevitably creates loo...

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...he point of the tax hike is not about deficit management but "fairness".

Margaret Thatcher did not miss the philosophical intent.

She famously characterised the attitude as preferring that ". . . the poor were poorer, provided that the rich were less rich".

Winston Churchill called it a belief in "the equal sharing of misery". Not the spin the proponents of punitive taxation would put on it, I am sure.

However, it shows that an articulate opponent can easily shine a light on the unattractive aspects of this attitude.

The problem for the Right is that there is a shortage of politicians in their ranks who feel comfortable articulating those arguments.

There aren't a lot of conservatives like Mrs Thatcher or old-fashioned liberals like Mr Kennedy brave enough to speak so well and so plainly. As long as that's the case, British Labour may be onto a winner.

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