International comparisons of top marginal tax rates and revenue impact

[John Short]

Although focusing on the UK, this paper provides international comparisons in arguing that at higher marginal rates, revenue will fall off as avoidance schemes and mobility will be implemented.
http://adamsmith.org/files/tax-paper-final(1).pdf

[petagny]

Ah yes, Laffer's elusive curve!

It's a truism that at 0% and 100% tax rates there will be no revenue, so there must be some form of relationship between these two values. Where the turning point is seems to depend on which end of the political spectrum the researcher lies with right-wing think-tanks finding that tax revenues start to fall at lower tax rates than social democrats. These two articles from Time and the Wall Street Journal exemplify the range of opinions:

http://www.time.com/time/magazine/article/0,9171,1692027,00.html

http://blogs.wsj.com/iainmartin/2010/08/29/danny-alexander-meet-the-laffer-curve/

The turning point (above which higher tax rates only result in lower total revenues) is going to depend on a number of factors, including the effectiveness of the tax administration, the number of loopholes in the tax code and, of course, the mobility of the tax base. Which side of the Laffer curve is the UK on? In my opinion (obviously not supported by the Adam Smith Institute!), the 50% tax rate is still set low enough to yield higher revenues and satisfies Colbert's dictum of yeilding the maximum quantity of feathers from the goose with the minimum amount of hissing. This seems to be the Government's view as well. This opinion is borne out by the evidence on the impact of the Reagan and Bush tax cuts, which merely weakened the fiscal position (probably their ultimate, if undeclared goal - see the Time article mentioned above, including the quotes from Laffer himself)

The mobile super-rich will already have made their arrangements whether the top-rate is 40% or 50%, and with the UK's ridiculous 'non-dom' rules the rate of tax is almost irrelevant for these people anyway. Incidentally, I heard the other day that super-rich immigrants to Switzerland can negotiate the rate of tax they are willing to pay with whichever canton they might to choose to reside in (final choice being heavily influenced by the outcome of the negotiations!). I don't think the UK should be joining this 'race to the bottom'.

[John Short]

No matter what the rates are, the effectiveness of the tax administration and  the number of loopholes in the tax code should be the same - both would be a good starting point for reform before even looking at rates and would have a positive impact on revenue yield.

[petagny]

Continuing the theme of taxation and incentives, Bill Easterley's blog has reference to some interesting research on the effectof corporate taxes on investment and entrepreneurship published in the American Economic Journal -  http://aidwatchers.com/2011/03/tax-rates-and-development/

The paper concludes:

'This paper presents basic statistical relationships between corporate taxes, investment, and entrepreneurship using new data on effective first-year and five-year corporate income tax rates for 85 countries. We present cross-country evidence that effective corporate tax rates have a large and significant adverse effect on corporate investment and entrepreneurship. This effect is robust if we control for other tax rates, including personal income taxes and the VAT and sales tax, for measures of administrative burdens, tax compliance, property rights protection, regulations, economic development, openness to foreign trade, seignorage, and inflation. Higher effective corporate income taxes are also associated with lower investment in manufacturing but not in services, a larger unofficial economy, and greater reliance on debt as opposed to equity finance. In these new data, corporate taxes matter a lot, and in ways consistent with basic economic theory.'

Amunition for the Irish stand against German and French pressure to 'harmonise' corporate tax rates?

[petagny]

Just took another look at the table comparing of top rates of income tax quoted in the Adam Smith report. As far as France is concerned, the figure looks misleading: on top of the 41% higher rate of income tax comes an additional 12.3% charge intended to make good the deficit in the social security funds. This 'temporary' charge has been in existence for at least 10 years. Levied on income and not correlated with benefit entitlements, this seems like an income tax in all but name.

A fairer comparison might also include all income-based social security charges.

[John Short]

You are right. Today's Independent in the UK writes about merging Income Tax and National Insurance - reported on the BBC Today programme, though it sounds if it has it wrong as it is a given as straight add on to Income Tax.  NI is only charged up to a certain level and then after that at 1 percent! So merger really has to look at incidence and income tax principles.  And what about the employer’s contribution? - Nothing has been said about that.  May be it should be merged with Corporation Tax and then it would not be a tax on employment.  Mention was also made of a PAC report on HMRC published today and an OECD tax report.  I will try to track these down but it may be a few days - back from Pristina late last night, off to Dublin for the second half of the double against England and then to Freetown for the week.

[petagny]

Rolling the employer's national insurance charge into corporation tax and ending a tax on employment sounds like a good idea in principle. However, one advantage of this tax is that the employees are located in the country and it is difficult to avoid. Big corporations can more or less choose where to declare their profits and pay their taxes (see the example of Barclay's tax bill). Such a move might mean that corporation tax ends up weighing heavily on SMEs that don't have the same opportunities to limit their tax bills. This would presumably have to be weighed against the employment generating effects (more income tax, lower benefit payments, etc.) Swings and roundabouts...