British performing radical experiments with income tax rates

An English friend alerted me to the fact that the British have been changing their income tax rates every year or two recently, thus providing some interesting data on the effects of such changes. The top income tax rate started at 40 percent (sounds high, but I am not sure that they have the same state and local income tax that we have in the U.S.; perhaps this 40 percent rate was pretty similar to what someone in California might pay, for example). In 2010 the top rate was increased from 40 to 50 percent and the number of people reporting incomes over 1 million pounds fell from 16,000 to 6,000. Now the rate will be set at 45 percent and the number of high income taxpayers is going up to 10,000. (Source: Daily Mail)

I was kind of surprised at the sensitivity of collections (which went down with the rise in rates) to these changes. In America we have been taught that people in Europe and the U.K. love to pay taxes to support a welfare state.

 

15 Comments

  1. Martin Barry

    December 5, 2012 @ 5:42 pm

    1

    The “99%” don’t mind paying their taxes because over their lifetime they’ll receive roughly the same value in benefits.

    The UK’s shifting rates have made it easy for high earners to lower their taxes by bringing forward income before rises and deferring it till after rate drops, much like all the “special dividends” coming out now to beat the expected rate rises in the USA next year.

  2. Jim Howard

    December 5, 2012 @ 5:49 pm

    2

    The Lafer Curve in action.

  3. Mark Verber

    December 5, 2012 @ 8:48 pm

    3

    Interesting. There was a similar study out of Stanford looking at how taxes on top tier in CA was effected. They found that when other factors (like variability of the economy) there wasn’t this sort of behavior. My joke with friends is because the good weather keeps up here, while the weather in the UK, well.., lets just say it’s not quite so nice. I have yet to see a good model which accurately predicts behavior in anything but the most extreme cases, so I am dubious of any ideological or case study position that don’t result in repeatable and correct predictions.

    –Mark

  4. Jonathan Tappan

    December 5, 2012 @ 11:14 pm

    4

    England per se has no state or local income taxes. I think Scotland and Wales have the power to impose their own taxes but I’m not sure. They all have local property taxes.

  5. Howard Jarvis

    December 5, 2012 @ 11:36 pm

    5

    Point of clarification. The rich pay an income tax rate of 52% in California (federal income tax + State income tax). This of course does not include paying sales tax, property tax, government fees etc. I have never read a conclusive study but I think the nominal tax rate for the rich is over 60% in California.

  6. Howard Jarvis

    December 5, 2012 @ 11:38 pm

  7. Ryan

    December 6, 2012 @ 1:14 am

    7

    One key point of that article.

    “It is thought that many of the highest earners moved abroad or reduced their taxable incomes to avoid paying the new levy.”

    That wouldn’t work in the USA since they tax you on your worldwide income. Even if you renounce your citizenship, there is some kind of exit tax

  8. David

    December 6, 2012 @ 8:23 am

    8

    The Daily Mail is a notoriously skewed news source.

    The changes in declared income in 2010 were largely due to high-income individuals pulling income forward to the tax year before the rate rais. See . In the following year, the policy change led to a modest increase in tax revenues.

  9. Dan Weber

    December 6, 2012 @ 11:37 am

    9

    there is some kind of exit tax

    Please provide some specifics about this. Where does it show up on the tax forms?

  10. jseliger

    December 6, 2012 @ 1:52 pm

    10

    I was kind of surprised at the sensitivity of collections (which went down with the rise in rates) to these changes.

    I’m not. Many people control how much they work and will reduce or stop work when their top marginal rate hits a particular number. When I was in high school, for example, my family’s consulting business would more or less stop working, or charge much more for the same work, right around the time we hit the top marginal rate—often in late November or early December.

    At that point it just wasn’t worth working that hard.

  11. Dan Green

    December 6, 2012 @ 5:41 pm

    11

    Dan Weber,

    This is fairly easy to find with Google.

    The tax requires anyone renouncing their citizenship to “mark to market” all assets and pay capital gains tax.

    See “http://en.wikipedia.org/wiki/Expatriation_tax”

  12. jim j

    December 6, 2012 @ 11:18 pm

    12

    Really? Really? This is what you have been taught? By whom? By the refrags at NRO?

    Have you heard of the Beatles? Taxman? C’mon.

  13. Julian

    December 7, 2012 @ 1:39 am

    13

    This drop in million-pound-earners was covered on the excellent BBC “More Or Less” podcast http://www.bbc.co.uk/programmes/b006qshd

    They interviewed a tax adviser who said that the 16,000 figure was exaggerated by people claiming income in the year before the tax change came through, and then not claiming it in the year when it changed, so the drop was much more marked than in real life. She also said that people would move income into non-taxable forms in order to escape the tax.

  14. James Grenier

    December 7, 2012 @ 9:10 am

    14

    In addition to Income Tax, the UK government levies National Insurance Contributions which rise to 12% of your income up to a certain level, and then IIRC 2% thereafter. Local Property Tax per se is not proportionate to income but is levied as “Council Tax” by the local Councils based on the value of the property.

    The taxable “income” of such high earners will also depend on other taxes such as Capital Gains Tax – senior executives are often in incentive schemes awarding shares or share options, the disposal of which will incur Capital Gains Tax. I’m sure their accountants juggle the full range of tax allowances to ensure the overall tax paid is minimised.

  15. Adam

    December 11, 2012 @ 12:07 pm

    15

    The UK also has Value Added Tax (which I guess is comparable to a state sales tax) which is currently set at 20%. There are few exceptions (food being the biggie) but jacks up the cost of all good across the board.

    While the original point is interesting, it ignores the wider political imperative over here. There is a limit to how much direct tax the average joe will pay which has led to governments of all stripes shifting the burden to stealth taxes (such as VAT) and pensions etc

Log in