To Answer The Guardian’s Question – 70% Income Tax Rates Won’t Work

The Guardian asks us a question in its headline here. To which, obviously enough, the answer is “No”. Betteridge’s Law is a real thing you know. Further, the answer to questions posed in The Guardian is definitely no. All that is required of us is to work out why that answer is in the not-affirmative. This involves some actual knowledge which isn’t going to be something the Guardian majors in on matters economic. Ditto thought and contemplation. We must thus supply those for ourselves:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Would Alexandria Ocasio-Cortez’s 70% tax proposal work in UK?[/perfectpullquote]

No.

Obviously enough Ms. Ocasio Cortez gets to talk about and vote upon tax laws for the US. Unless we’re into a great deal more colonialism than we think that’s not going to extend to over here. But perhaps it’s just the idea itself? To which the answer is again no.

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Given the low numbers of high-tax payers involved, Ocasio-Cortez’s suggestion of a 70% rate for those receiving more than $10m would mean very few people outside of FTSE 100 chief executives and hedge fund bosses would pay such a rate.[/perfectpullquote]

Well, not even them. There are very few FTSE100 bosses that make that much for starters. But more importantly this is about income tax rates. And none at all receive wages or salaries of that sort of amount. They’re paid in shares, restricted stock awards and the like. Which tend not to be paying income tax rates but other provisions of the tax code.

In fact, to any reasonable level of accuracy we could say that the number of people making $10 million a year in income, subject to income tax provisions, is around and about zero. A tax which raises no revenue may be cathartic but not much else.

But there’s a more technical issue here. Alluded to by The Guardian:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Higher income tax rates could result in wealthy individuals shifting their earnings into company shares, which attract a lower rate of taxation as capital gains, or into offshore vehicles. Globalisation has increased in recent decades, meaning that the super-rich can more easily relocate their tax affairs.[/perfectpullquote]

Indeed. And we’ve had this before when discussing Paul Krugman’s views on Alexandria OC:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Well, no, Peter Diamond doesn’t think that. The Diamond and Saez paper is here and the important point to understand is this:[/perfectpullquote] [perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Thus, the distinction
between real responses and tax avoidance responses is critical for tax policy. As an
illustration using the different elasticity estimates of Gruber and Saez (2002) for high
income earners mentioned above, the optimal top tax rate using the current taxable
income base (and ignoring tax externalities) would be *=1/(1+1.5 x 0.57)=54 percent
while the optimal top tax rate using a broader income base with no deductions would be
*=1/(1+1.5 x 0.17)=80 percent. Taking as fixed state and payroll tax rates, such rates
correspond to top federal income tax rates equal to 48 and 76 percent, respectively.[/perfectpullquote] [perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]The really important part being “no deductions”. This needs to be read widely. They mean that the existence of a different capital gains tax rate is a deduction – because it is possible to move income into capital gains. And so on – no deductions means the near abolishment of near all of the tax code other than just that top rate.[/perfectpullquote] [perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]If we have a system with deductions – and it’s near impossible to imagine one without at least some say, for everyone except Americans, just leaving the country – the optimal top rate becomes that 54% on incomes, something that’s already achieved in most Blue States when local income taxation is included.[/perfectpullquote]

Let us indeed take the Nobel Laureate’s views as being sound here. Top tax rates upon incomes – note upon incomes, not just income tax, so in the UK situation including employers’ national insurance plus employees’ – peak optimally at 80% in a system with no allowances, at 54% in one that contains them.

OK, we’ve got allowances – CGT is a different rate from income tax as it should be.

But what’s the major difference in the income tax systems between the US and everyone else? The US bases taxation upon citizenship. You’ve a US passport you pay tax wherever you live on your worldwide income. Everyone else uses residency. Moving out of the country means, just by moving out, that you’re not in the tax system. This is something of an allowance, no?

Thus whatever that Laffer Peak is for the US the one for the UK is going to be lower. And please do note, this isn’t just some neoliberal handwaving about how we Brits are culturally different or anything. This stems entirely from the logic being used to calculate what that top tax rate might be. We’re entirely within the logic and belief system being used in the first place.

So, obviously, the answer to any Guardian headline question is no. But in the case of 70% income tax rates for the UK it’s no as a result of the very calculations first used to think of a 70% income tax rate. For people can just bugger off and why wouldn’t they? As, in fact, they did last time we tried this.

And if this weren’t all true then why is it that some of those advocating higher income tax rates also nurse a desire to make the UK taxation system passport, not residency, based?