Higher rate taxes may be politically popular, but it makes no economic sense, writes Brian Monteith
This is undoubtedly a year of anniversaries. For Scots, the 700th birthday of the Battle of Bannockburn will be celebrated while the commemoration of the start of the Great War will initiate more poignant ceremonies, given the huge sacrifice made by so many Scots. While my namesake Sir John de Menteith fought alongside Robert de Bruis and lived to sign the Declaration of Arbroath, fortune was less kind to my great-grandfather, who fell prey to a sniper’s bullet within a year at Ypres.
While I will mark both events, I shall also be recalling on 9 November the 35th anniversary of the fall of the Berlin Wall, that iconic moment that signifies the collapse of the Soviet empire spread over a period of years. It was generally thought at the time that it would preface the collapse of socialist ideology and bring about a peace dividend, but neither have happened despite manifest changes in politics and military deployment.
While the Cold War meant the world was balanced precariously between peace and armageddon, the threat for most people seemed unreal and distant. Now, during this period of a growing jihad – that confronts western democratic values and threatens to divide even further Shiite and Sunni, and split the Middle East and beyond with new sectarian borders drawn in blood – the violence seems altogether more real and able to take any of us on a bus, in a train or at the airport.
Illustrating this point, two colleagues who worked for the same firm as myself – helping improve lives of the impoverished in the poorest, most unequal countries of the world – were killed in a Kabul restaurant last week. One was very likely to have been elected as an MEP at this May’s European Parliament elections.
Likewise, while the old-style socialism represented by the Soviet Union, and once defended so vehemently by many Labour MPs, has faded away to the point that even Cuba now allows self-employed barbers to rent their chairs from the state, attempts to reignite the class war continue to surface. The challenge presented by those that would control and plan our lives economically, socially and culturally is no less: it has simply taken different forms and bears a wider, brighter grin.
We see it from those that tell us more than ever before what we can and cannot eat, drink and inhale, and we see it from those that tell us what we should earn, what we should pay and what larger share we should give to the growing government.
Just as I often feel less safe than I did before the fall of the Berlin Wall, I often feel less free and see the threats to both my security and freedom growing. Illustratating the second point, both shadow chancellor Ed Balls and erstwhile ‘shadow’ SNP leader Jim Sillars have advocated taxing the rich more to deliver a more equitable, fairer society and increase tax revenues. It would be neither fair nor equitable and would have precisely the opposite effect on revenues – meaning lower-rate taxpayers would end up paying more!
On the question of equality – of which we are repeatedly told a Brave New Scotland will become, if only we are to rid ourselves of those (by inference) more selfish English – it has always struck me as odd that, to achieve equality, we must treat people unequally. If we are all equal before the law, why should we tax those who have aspired, studied and worked hard to achieve an ambitious goal and been rewarded for it? Creating ever higher taxes for higher earners creates greater inequality not just in the treatment of people but in the outcomes the policy delivers.
Ed Balls undoubtedly thinks that it is smart politics to woo the majority of standard-rate taxpayers with the promise that a small minority will pay more – so they do not have to. But what makes cunning politics does not necessarily make clever economics.
The historical evidence tells us that when governments as varied as those of Coolidge, Kennedy, Reagan and Thatcher cut higher marginal rates, the rich created more wealth and paid more revenues, easing the burden on the masses. The latest information is no different, with the 50p higher rate self-assessment income tax revenue falling from £21.7 billion in 2009-10 to £20.6bn last year. With the rate reduced to 45p, it is forecast to surge to £27.4bn in 2014-15.
It used to be when Conservatives suggested tax cuts, Labour politicians would ask what public services would be axed to fund them. Now Ed Balls should be telling us what services he would cut when losing nearly £7bn of income.
The same rules apply to Jim Sillars, of course. His cry for an even more unjust tax regime of 55p came just after a study by economists at Stirling University informed us that if Scotland’s income taxes were increased, the revenues would be nothing like those predicted – thanks to people moving to different tax jurisdictions or adjusting their behaviour.
The study found that after considering the effect of migration and labour supply, the revenue raised in Scotland from a 1p increase on the standard rate income tax could fall from an expected £320 million to £210m, while the revenue raised from a 1p increase in the upper rate of income tax could fall from an expected £40m to only £2m. As Eben Wilson of Taxpayers Scotland observed, it is not so much the pips squeaking as the pips fleeing.
This needs to be put in the context that, in 2014, 48 per cent of income tax revenues will be paid for by the wealthiest 5 per cent of taxpayers. From my past research, the number of top-rate taxpayers in Scotland is not usually at great variance with the rest of the UK so we can expect the revenue shares to be similar. Is there anyone who truly believes an independent Scotland could last five minutes with a higher top rate of tax than our closest neighbour, England? Where would Jim Sillars’ spending cuts be made to make up the deficits likely to arise – or which other taxes would have to go up to plug the hole?
This is why socialist command economies build walls to keep their people in – reminding us that for East Germans, unionism under capitalism was more attractive than independence under socialism.