The Chancellor of the Exchequer, Mr Darling, has given fair warning that income tax will rise to a rate of 50% for those who earn more than £150,000 a year. I should point out that these high earners will also have to pay about 11% of their income in National insurance – a tax with a different name, so that the highest marginal rate will be 61%. Since the announcement the newspapers have been full with reports from extremely wealthy people complaining about this tax.
Of course these people do not complain for themselves, but complain that the high rate of tax will probably stifle entrepreneurship by encouraging very talented people to leave Britain to go into tax exile abroad. These wealthy folks are not at all concerned that they might have to pay a few pounds more themselves. Their concern is for the effect of a high tax upon the nation’s prosperity, because it is feared that the “wealth creators” will leave the country.
Apparently all it takes is a global recession – the worst in the lifetimes of most of us, and an extra ten percent in income tax to “stifle” people’s desire to build up large businesses. Instead they will not build up large businesses in Britain but go and “live” abroad and build up their large business there!
Well, first of all it would be a fortunate if unintended consequence of the high tax rate if Mr Fred Goodwin and those of his ilk left the shores of these islands to carry out their activities, which have impoverished so many, abroad.
Secondly in these difficult times it is not unreasonable for the high earners to pay higher tax rates than the low earners.
Thirdly, most wealth creators are not motivated by very high incomes but by the prospect of selling the company that they have built for a large capital gain. Capital gains tax is at the rate of 18%, which is not a rate to stifle wealth creation.
Fourth, people have always created wealth. When taxes are very high wealth is still being created, new companies spring up and make jobs, but the owners of those new companies simply hang on to less of their earnings.
The problem with all taxes is that most governments waste large amounts of tax. The present Labour Government (I choose them because they are in power and their waste is uppermost in our memories) have wasted huge amounts of our taxes on (just a few examples) the war in Iraq, building the Millennium Dome, increasing unnecessary bureaucracy and now threaten to waste billions on an identity card scheme. They have also created a zeitgeist of unnecessary jobs, unnecessary undergraduates studying unnecessary subjects, and a default position where many who claim to serve the public, also eat greedily like pigs at the trough.
This waste is probably inevitable. It is produced as a result of the natural corruption that power brings and the ordinary vanity and foolishness of humans. It will always exist and you can comfort yourself with the certain knowledge that much of your tax will be wasted, whether you earn plenty of money or just a small amount of the stuff.
We are now entering times when everyone will have to be careful with what they spend, including the government. I expect that there will be les waste, because the government will have less money to waste.
I also think that by concentrating on income tax rises Mr Darling has given the wealthy the opportunity to complain about the effect of the tax rise on wealth creation. He has missed a trick.
In my experience those that earn a great deal of money increase their carbon emissions proportionately as their income increases. They buy and use very powerful cars, they frequently fly and when they do, they fly first class and they usually buy and live in very large houses. They have massive carbon footprints.
If taxes were increased on these climate change activities of individuals it would not stifle wealth creation.
All taxes are inherently and of necessity unfair and have unfair consequences, which is why Robin Hood was so popular. Taxes on emissions might still have unfair consequences but they will be less unfair than most taxes and Mr Darling could do worst than to look at them.