Last week, a letter appeared in the correspondence columns of the Financial Times urging the government to abandon the 50p marginal tax rate for high earners. It was signed by a twenty-strong gathering of university professors, consultants and business gurus. According to this scholarly coterie of sooth-sayers, the 50p rate is inflicting “lasting damage” on the UK economy.
They offered no evidence for this dramatic assertion, nor has any emerged during the heated but hardly illuminating debate that has followed.
Information on the relationship between personal income tax rates and economic growth is admittedly hard to come by (see Atkinson: Income Tax and Top Incomes...), though this is hardly a reason for not trying to marshal a few facts. One wonders if the letter’s signatories might not have compromised their usual rigorous academic standards in their understandable desire to shield high earners - among whom they are undoubtedly numbered - from doing their bit for the country.
According to a recently published report by the Word Economic Forum, the UK is one of the most competitive economies in the world. Here is the report’s judgement of the matter:
“The United Kingdom continues to make up lost ground in the rankings this year, rising by two more places and now moving back to the top 10 for the first time since 2007. The country improves its performance across the board…”
Most of us, with the obvious exception of our learned harbingers of doom, might be tempted to read this as an accolade. Leaving aside international comparisons, does the UK’s recent experience show any correlation between economic growth and marginal personal income tax rates of a kind that would support the professors’ letter?
Summary data on personal income tax are available for 1973 - 2010, a period during which marked changes occurred in marginal rates. A simple regression analysis should, therefore, offer some pointers - as, indeed, it does, though not of the kind of which our scholars would likely approve.
In 1973, the top marginal rate was a whopping 75%. As it happens this was also the year in which the UK enjoyed one of the highest levels of economic growth in post-war history: 9.75%. In the following year, the rate increased to an even more whopping 83% and remained at that level for five years. Growth certainly slowed during that period, although it was recessionary in only one year and was positive overall. When Margaret Thatcher came to power in 1979, the rate was lowered to 60%, and then to 40% towards the end of her period of office.
What difference did these changes make to the UK’s economic performance? Hard to say. The correlation between marginal rates of income tax and UK GDP growth is so small as to be statistically insignificant. That is to say you would get the same kind of statistical result if you measured growth against output of hot dinners or annual showers of rain. Even worse for our economics pundits, the country grew faster when the marginal tax rate was 60% than after it was lowered to 40%.
Instead of abandoning the 50p rate, therefore, perhaps the Chancellor should raise it to 60p. That sounds like an attractive idea, good for the country, fair to the people, and a just response to those erudite Cassandras whose sterling efforts to reduce the tax burden on the rich so eloquently testifies to their concern for the welfare of the nation.
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