Corbyn is Wrong on Tax | Ben Somervell

The Labour Party's 2017 General Election manifesto rightly included costings but the document was not independently costed. These costings relied entirely on the presumption that if the Government increases tax rates, the total tax revenue will necessarily and consequently also increase. In theory and in principle this presumption appears to be logical upon first glance. However, we do not live in an ideal world and the presumption has, in practice and in reality, it has been shown to be false time and time and time again. In fact, the exact opposite has been shown to be true.

When George Osborne cut the top rate of tax in 2012 from 50p-in-the-pound to 45p, Labour predicted that revenue would fall by £3bn but revenue instead increased by £8bn from those earning over £150,000 per year. The richest 1% went from paying 25% of all taxes under the 50p rate to paying 27% once the rate had been abolished. Under Osborne after the cut, the top 3,000 earners paid an average of £2.6 million each in income tax and the top 3,000 earners paid more tax than the poorest 7.5 million earners. George Osborne squeezed more tax revenue from the rich than any Chancellor before him. In 1979, Chancellor Geoffrey Howe cut the top rate of income tax from 83% to 60%. Before the cut, the richest 1% paid just 11% of the total tax revenue but, after the cut in 1988, they paid 14% of the revenue. Chancellor Nigel Lawson cut the top rate from 60% to 40% and revenue rose. In fact, at times during his tenure, the total tax revenue almost doubled. The richest 1% paid 21% of the total revenue from income tax in 1997. This effect can also be seen with corporation tax. The total revenue from corporation tax was 55% higher in 2016 with the 19% rate than it was in 2010 when the rate was 28%.

In the USA President Calvin Coolidge cut the top rate of federal income tax in stages from 73% in 1921 to 25% in 1925 and finally to 24% in 1929. Those earning $100,000 or more per year went from paying 28% of all taxes in 1921 to paying 51% of all taxes in 1925 and then to paying an incredible 65% of all taxes in 1929 and the overall amount of taxes also grew. Even Democratic President John F. Kennedy knew that the way to maximise the total tax revenue and to maximise the proportion paid by the rich was to cut the top rates. He cut the top rate from 91% to 70% and this led those earning $50,000 or more to go from paying 12% of all taxes in 1963 to paying 15% of all taxes in 1966. The total federal income tax revenue also rose from $69bn in 1964 to $96bn in 1968 and Kennedy called this effect the 'paradoxical truth'. In 1981 President Ronald Reagan performed the largest ever cut in US federal income tax from 70% in 1981 to 50% and, as a result, the richest 1% went from paying 18% of the revenue in 1981 to paying 28% after the cut in 1988. When President George H.W. Bush raised the top rates of income tax, expecting a rise in revenue, the opposite happened and his move was counter-productive. His son, President George W. Bush, learnt from this mistake and cut the top rates and, in only two years, this led to an increase in the total tax revenue from those earning at least a $1,000,000 a year from $132bn to $273bn. In the four years after Bush's 2003 tax cuts, the total revenue rose by 44% from $1.782 trillion to $2.568 trillion.

All of these examples therefore show that when the top rates of income tax are increased, the total tax revenue falls and so does the percentage of it which is paid by the richest 1%. Conversely, it is clear that when the top rates of income tax are cut, the total tax revenue rises and so does the percentage of it which is paid by the richest 1%. Here's the reasoning behind the examples. If the top rate of income tax is increased, more rich people and businesses will emigrate and less businesses and rich people will immigrate to the UK. Furthermore, more businesses and rich people will be incentivised to endure the risk and cost of trying to illegally evade tax. You therefore end up with a lot less businesses people paying a higher rate of income tax which inevitably brings in a lot less revenue and leaves poorer people to pick up the bill. If, conversely, you cut the top rate of income tax, less businesses and rich people will emigrate and more rich people will immigrate to the UK.
Furthermore, less businesses and rich people will be incentivised to endure the risk and cost of trying to illegally evade tax. You therefore get a lot more businesses and rich people paying a lower rate of income tax which inevitably brings in much more revenue. Additionally, if more businesses move to the UK and/or invest in the UK, unemployment will fall, the economy will grow and so will output.

Any tax policy should have two aims: to maximise the total tax revenue and to maximise the percentage of it which comes from the richest 1%. I find it baffling how socialists, who constantly talk of the need for more tax revenue to fund their spend and of the need for the rich to pay their “fair share”, refuse to use the only method which achieves these ends. You see socialists tax businesses and the rich out of spite because they have a grudge against them.

In contrast, fiscal conservatives tax businesses and the rich for pragmatic and practical reasons - because they want to maximise the total tax revenue and they want to maximise the percentage of the total tax revenue paid by the richest 1%. Fiscal conservatives squeeze the most money out of the rich while socialist tax policies lead businesses and the rich to flee the country. The richest 1% of earners already pay 27% of all income tax and they pay twice as much in tax as the poorest 50% do.

Ben Somervell | @bensomervell1