BRITAIN'S 50p TAX RATE: FOR OR AGAINST?

By Professor Mark Harrison and Professor Andrew Oswald, Department of Economics

The instigation of the temporary 50p tax rate on higher incomes has caused a great deal of debate amongst economists. Professor Mark Harrison was amongst the 20 economists who signed a letter to the Financial Times, urging the government to scrap the rate, while Professor Andrew Oswald addressed a letter to the same newspaper defending the decision. Here we look at the correspondence and ask: Which view do you support?

Coalition must ditch 50p tax rate for growth

Sir, We welcome the government putting the promotion of growth at the top of its agenda given the fragile state of the UK economy. Other major economies have got back to pre-recession output levels; the UK has not.

In this context, we are concerned that Britain’s 50p income tax is doing lasting damage to the UK economy. It gives the UK one of the highest personal tax regimes in the industrialised world, making it less competitive internationally and making us less attractive as a destination for both foreign investment and talented workers.

The UK has already slipped from second to fourth place as a destination for inward investment. It punishes wealth creation by imposing on entrepreneurs and business people a marginal tax rate in excess of 50 per cent once national insurance contributions are added in. This is particularly damaging when the UK needs to create new businesses in new industries and promote growth by small companies, which can grow fast. It applies to just 1 per cent of taxpayers, who already pay 24 per cent of all income taxes.

If a small portion of these highly mobile workers move elsewhere because of the 50p rate then it is clearly a self-defeating way for the Treasury to try to raise money, and a reduction in tax avoidance would be more effective. It is often portrayed as a justified tax on the rich but the economic damage it causes means that it is against the interests even of ordinary workers who don’t pay it.

We call on the government to drop the 50p tax at the earliest opportunity as part of a package of measures to stimulate growth. Only by returning to an internationally competitive tax regime will Britain enjoy long-term sustainable economic growth.

For a more in-depth analysis of the issue, read Prof Mark Harrison's blog post, Britain's 50p Tax Rate: The Evidence Against »

Millionaires, migration and the minimal effect of tax rate

Sir, My colleagues’ letter (above), which argues that the UK should abolish its 50p income tax rate, cites no evidence. Such evidence exists. It is not favourable to the authors’ case.

The best-designed recent study, which also gives references to the research literature, is “Millionaire Migration and State Taxation of Top Incomes: Evidence from a Natural Experiment” by Cristobal Young and Charles Varner in the 2011 National Tax Journal. The authors examine what happened when New Jersey abruptly raised its income tax rate on those people with incomes above $500,000 a year.

This is a helpful case study for those who wish to think about the design of UK tax policy because although the rise in the tax rate was fairly small, the authors’ statistical analysis is an unusually careful one and because it is easier for a person to move 30 miles from New Jersey to Pennsylvania (where the top rate of tax is then immediately 6 percentage points lower) than it is to move from the UK to another country.

The study finds that the effect of the New Jersey “natural experiment” was, in the authors’ words, minimal. Yes, the data reveal that there was some out-migration, but it was tiny. Moreover, the migration occurred among the retired and those living on investment incomes. The study did not find that entrepreneurs were pushed out of an area by a rise in the top rate of income tax.

Andrew Oswald, Professor of Economics, University of Warwick, UK; Senior Advisor (Research), IZA Institute, Bonn, Germany

Mark Harrison is a Professor of Economics at the University of Warwick and a research fellow of the Hoover Institution on War, Revolution, and Peace at Stanford University. He has written or edited a number of books including Guns and Rubles: the Defense Industry in the Stalinist State, published in 2008 in the Yale-Hoover series on Stalin, Stalinism, and the Cold War; The Economics of World War I (Cambridge University Press, 2005); and The Economics of World War II (Cambridge, 1998). His articles have appeared in leading journals of comparative economics, economic history, and Russian studies.

Andrew Oswald is a Professor of Economics at the University of Warwick, and currently, a Visiting Fellow at IZA, Bonn. His research interests lie in the field of Applied Economics and Quantitative Social Science, and he is particularly well known for his work on the economic and social determinants of happiness and mental health. Prof Oswald has written over 200 articles for newspapers and magazines, and given numerous broadcast-media interviews around the world. One article that provoked a public debate was his 19th January 2006 Op-Ed in the Financial Times entitled "The Hippies Were Right All Along about Happiness".