Nicola Sturgeon’s failed policies are what’s really morally repugnant - Brian Monteith

Nicola Sturgeon has branded the cutting of the 45 per cent Additional Rate of Tax back to the 40 per cent Labour had it for practically all of its 13 years in office as “morally repugnant”, arguing it is “indefensible” to cut taxes for top earning workers (while conveniently forgetting to mention all the other tax cuts for everyone else too). Clearly her inference is best earners should pay at least the same rate, if not more – like they already do in Scotland.

First Minister Nicola Sturgeon during First Minster's Questions (FMQ's) in the debating chamber of the Scottish Parliament
First Minister Nicola Sturgeon during First Minster's Questions (FMQ's) in the debating chamber of the Scottish Parliament

The First Minister insists she will not follow Kwasi Kwarteng’s policies and match his cuts even though she has been given money to do this. How then, should she go about getting the top earners to pay more?

The reality is if you want the highest earners to pay more tax (and everyone with a keyboard or a soap box appears to demand this) then cutting the marginal rates of their taxes is, surprisingly, what delivers this result. Whereas raising top tax rates brings lower revenues as its victims choose to become less productive (what’s the point, they ask) or find ways to reduce their tax liabilities.

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It might be difficult for the First Minister to get her head round the counter-intuitive nature of how people respond to personal incentives, but when top rate taxes are cut not only does the cash amount of revenue increase, but the proportion of income taxes paid by the top earners rises too.

Let us amble through some economic history using international examples that show this is a human phenomenon not peculiar to just the UK.

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During the Great War the top rate of US income tax was raised to 71 per cent with dire economic results and was later cut to 25 per cent by Presidents Coolidge and Harding. Revenues nearly doubled with the share of tax paid by those earning over $100k rising from 28 per cent in 1921 to 51 per cent in 1925.

In 1963 President Kennedy's tax cuts reduced taxes at all levels, cutting the top rate from 91 per cent to 70 per cent. Total income tax revenue increased from $68.8bn in 1964 to $95.7bn in 1968 with the share of taxes paid by those earning over $50k rising from 12 per cent in 1963 to 15 per cent in 1966.

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Falling for the “morally acceptable” nostrum that to raise revenues required tax rates of the wealthiest to be increased, President George Bush raised the top income tax rate to 31 per cent in 1990. Tax receipts then fell as a percentage of GDP in 1991 and richer taxpayers paid $6.5 billion less than they had in 1990. By contrast in 2003 his son, President George W Bush, reduced the highest rate of income tax from 39.6 per cent to 35 per cent and the dividend tax from 39.6 per cent to 15 per cent. From 2004 to 2007 federal tax receipts increased by $785 billion with the bulk coming from the better off.

During the period 2003 to 2006 the number of Americans filing tax returns claiming income of over a million almost doubled, from 181,000 to 354,000. The total taxes paid by these millionaire households rose by 107 per cent in just two years, from $132 billion to $273 billion.

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This narrative is not exclusive to the United States. When the top federal tax rate in Canada was cut from 45 per cent in 1981 to 29 per cent in 1990, the share of tax receipts paid by the top 10 per cent of taxpayers grew from 29 per cent in 1981 to 45 per cent in 1992.

Let’s now look at the UK. In 1979 the top 1 per cent of UK taxpayers paid only 11 per cent of the total income tax take when Chancellor Geoffrey Howe cut the top rate from 83 per cent to 60 per cent – by 1988 they were paying 14 per cent of income tax revenue.

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Then In 1988 Nigel Lawson cut top rates from 60 per cent to 40 per cent and receipts rose further. By 1997 the top 1 per cent of earners paid a huge 21 per cent of the total tax bill.

In April 2013 Chancellor Osborne cut the additional rate of income tax from 50 per cent to 45 per cent. In the subsequent year £8bn more revenue was raised. The top 1 per cent of taxpayers now pay 30 per cent of income tax.

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All the foregoing evidence suggests the cut in the top UK rate from 45 per cent to 40 per cent will increase tax revenue and any subsequent raising of the rate from 40 per cent would decrease revenue. Is raising more from the wealthy by cutting tax rates what’s really “morally repugnant?”

I would have thought the failure in educational attainment, drug rehabilitation, the decline of Scotland’s NHS and the stench coming from the failed ferry contract are morally repugnant – not least when the largest share of money underwriting these failures comes from the tax payments of the highest earners in London and the South.

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It used to be the top 1 per cent of UK earners paid 11 per cent of the tax revenues, but by cutting their tax rates the richest 1 per cent have ended up now paying a nearly a third of all income tax revenue. The morally repugnant policy is not to cut taxes, it is to put them up.

John Swinney must hold his nationalist nose and match Kwasi Kwarteng’s tax rates. Morally it’s the right thing to do. Or is the idea just to persecute high-earners even though it brings in less revenue?

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Brian Monteith is a former member of the Scottish and European Parliaments and a Senior Adviser to the Tax Reform Council

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