Surtax on wealthy in UK results in lower revenue

Barack Obama has spent the last several months insisting on a tax hike for higher income earners in the US, casting it as an issue of “fairness” and of deficit reduction.  In his State of the Union speech, Obama used the word “fair” or a derivative nine different times, and calling for the wealthy to pay their “fair share” of taxes — even though the wealthy account for a much higher percentage of income-tax revenues both as a share of the revenues and as a share of income than the rest of the population.  Democrats have tried to push through a “surtax” on income over a million dollars in a year in order to put Obama’s rhetoric into reality.

Speaking of reality, the UK did exactly what Obama and the Democrats propose to do here — pass a surtax on high-income earners.  The new tax rate of 50%, which took effect at the beginning of the year, was expected to raise a billion pounds in extra revenue each month.  So how did that work out?  Tax revenues dropped by more than £500 million:

The Treasury received £10.35 billion in income tax payments from those paying by self-assessment last month, a drop of £509 million compared with January 2011. Most other taxes produced higher revenues over the same period.

Senior sources said that the first official figures indicated that there had been “manoeuvring” by well-off Britons to avoid the new higher rate. The figures will add to pressure on the Coalition to drop the levy amid fears it is forcing entrepreneurs to relocate abroad.

The self-assessment returns from January, when most income tax is paid by the better-off, have been eagerly awaited by the Treasury and government ministers as they provide the first evidence of the success, or failure, of the 50p rate. It is the first year following the introduction of the 50p rate which had been expected to boost tax revenues from self-assessment by more than £1billion.

Oopsie!  It turns out that the wealthy can find ways to shelter income when government drives the cost of taxes high enough to make it worthwhile.  If that means taking their money and going where the tax laws are more welcoming to investment, then this particular population has fewer barriers to making that solution work than most of the middle class.  Instead of gaining more revenue, the UK will end up losing revenue, and not just from the sheltering — but also in lost economic growth as the wealthy have to put that capital to sleep rather than make it work in the economy.

Obama’s plan to hike capital-gains taxes to 20% and push a surtax on higher earnings will produce the same result here.  The capital that might have gone to work in the US will go to work somewhere else or not at all, which will not just kill the direct revenues expected in static tax analysis from the hike, but also discard the revenues that would have occurred had the capital been put to work here.  That’s the lesson from the British face-plant on surtaxes, and hopefully the US learns that lesson the easy way.

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David Strom 3:21 PM on February 03, 2023