As Scotland Is Finding Out – Higher Income Tax Rates Can Mean Less Income Tax Collected

The basic contention of the Laffer Curve is that a tax rate can be “too high”, meaning that a lower rate would collect more revenue. Note that the insistence isn’t that any lower rate will produce more revenue, but that there’s a curve and it’s possible to be beyond the peak of it. Laffer Effects are when we see the beginnings of this – some people not working so hard, leaving the country and so on, even perhaps not arriving in the taxing jurisdiction. It’s still possible that revenue will rise as the effect (umm, Effect) leading to revenue losses is smaller than the higher rates bring in from those whose behaviour has not changed. The Effect being the precursor to the Curve thing if you like.

There’s a warning that this is about to start happening in Scotland:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] The income tax gap with the rest of the UK could put some people off coming to work in Scotland, economists have said. Scotland’s finance secretary confirmed on Wednesday he will not pass on a tax break for higher earners that was announced by the chancellor in October. It means people earning £50,000 in Scotland will pay £1,500 more income tax than elsewhere in the UK. The Scottish Fiscal Commission said it could make people “think twice” about working in Scotland. And they predicted it would also make others consider leaving Scotland or changing their residency status, and would have an impact on whether people go for a promotion or work more hours. Overall, they forecast that this “behavioural change” will reduce income tax revenues in Scotland by about £6m a year. The Scottish government argues that the country has a fairer tax regime than the rest of the UK, and that people living in Scotland get perks such as free university tuition and personal care that other parts of the UK do not offer. [/perfectpullquote]

Now, whether it actually will happen that way we’re unsure of. We know that at some rate it all happens, what rate and how much those two are still vociferously argued about. The claim here is that the Effect will be such that Scotland goes over the peak of that Curve. It’s believable even if not certain. For we do just about think that the peak of the curve is some 54% in taxes upon income, which when we count national insurance as we must means an income tax rate in the 40 to 45% range. The Treasury certainly claims that the 50 p income tax rate was a revenue loser overall.

There’s a lot of hemm and haw here, sorry about that. But we really do know that tax rates do influence location. It’s which tax rate an how much influence which is to be argued over:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]A new NBER study of 14 European nations finds that football players tend to locate in countries that have comparatively low income tax rates. This response to tax rates is especially pronounced for the most able and well-paid athletes, and is actually negative for the least able and lowest paid among the professionals. Often, national tax breaks designed to lure top-notch foreign players displace the domestic players in a league.[/perfectpullquote]