Higher tax rates mean lower tax revenues

Alister Heath of City AM has produced some more good topical figures to show that lower tax rates bring more jobs and more wealth and income to tax.

Apparently those states in the US like Texas and Florida which levy no additional state Income Tax on top of federal taxes have seen 89% more jobs created and 32% faster personal income growth than states with high state and local income taxes. As soon as one state introduces higher rate tax on the successful, they hop over the border into a low tax state, reducing the revenues of the high rate state instead of increasing them.

It adds to the case I set out before, based in the UK’s past history of lower and higher income tax rates, and based on international comparisons.

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19 Comments

  1. Robert George
    Posted February 9, 2010 at 7:50 am | Permalink

    This is exactly what I have done with my business. It used to be 30% in Oz and 70% UK. In the past two years it has changed to 65% Oz and 35% UK. Depending on what happens post election I have made contingency plans to reduce the UK operation to sales office only. Decision will be almost entirely Tax driven.

    I know that business's of 50 to 100 people fly under the radar of governments but we pay unusually high salaries and the knock on effect of many business's like mine must be significant

  2. Norman
    Posted February 9, 2010 at 8:18 am | Permalink

    If we're fortunate enough to get a Conservative government in 2-3 months time after a period of a year or two steadying the ship one would hope this type of policy would start to make itself felt again in the UK and try and undo some of the terrible damage that has been wrought to our economy over the last 12 years.

    It will be a difficult decision as to when to start cutting taxes to stimulate growth versus the temptation to try and keep high taxes to limit our rampant borrowing.

    • Robert K, Oxford
      Posted February 10, 2010 at 10:03 am | Permalink

      Why do you hope for Conservative government when their tax policies are little different from Labour? (They support the 50% upper tax rate and appear to be backtracking on their inheritance tax promise for example.) They have made no substantive comments on how to rebalance the calamitous imbalance between the state and the private sector and have public spending targets that seem almost identical to the Brown’s. They are simply trying to sniff the public mood, as if a chance scent will put them on the right track. If the media is to believed (which in this case I suspect it can) its spin doctors are terrified that a shift to the “right” would leave them exposed to a Labour charge on the centre ground. But wouldn’t it be great if they adopted the more radical tone of JR’s diary, so that voters had a genuine choice?

      • Norman
        Posted February 10, 2010 at 11:41 am | Permalink

        I agree with all the points you make – the Party's leadership consistently appear dithering and weak willed but this government has to be one of the most incompetent this country has ever had otherwise it would undoubtedly be election defeat number four.

        The reason I believe a Conservative government will cut taxes is simply because that is what conservatism is, if they don't at some point start cutting taxes to enable the private sector to compete against other countries they will fail without the shadow of a doubt.

        The alternative is a Labour government whose aims are socialist and make no secret of the fact that their approach is based on universal increase of taxation (heaviest on the 'rich'), redistribution of wealth and big government.

        There is zero chance Mr Cameron will do an about face this late in the day (although I wish he would over CO2 being a poison) so we either take it or leave it. I'd rather take lukewarm conservatism over firebrand socialism but I'd still rather have proper conservatism over both.

  3. Stuart Fairney
    Posted February 9, 2010 at 8:31 am | Permalink

    No argument here, but why not take this argument to its logical conclusion. If lower taxes produce faster growth, just imagine what zero income tax might do. Consider the benefits

    – much faster growth
    – ending the poverty trap making it worthwhile to come off benefits
    – ending the notion that the state owns your money and graciously allows you to keep some

    And if any Keynesians object you might suggest this would be one hell of a "fiscal stimulus"

    Now that is a tory party you could actually vote for and I might also suggest that abolishing tax on income might be rather popular electorally.

    • Robert K, Oxford
      Posted February 10, 2010 at 2:27 pm | Permalink

      Absolutely. The whole notion of income tax is based on state-sponsored violence. Take a look at the HM Government Revenue & Customs website if you don’t believe me. It was introduced as a temporary tax to fight Napoleon, was reinforced by the need to fund war in the Crimea, was hiked dramatically for WWI and hit its extortionate heights after WWII.

      • Stuart Fairney
        Posted February 10, 2010 at 5:59 pm | Permalink

        Quite, when things are just accepted as the norm, it doesn't hurt to say "Why?" once in a while. I honestly believe the whole case for income tax is invalid and arguments about rates are peripheral to the fundamentally unsound principle.

        Ron Paul gathered great support for saying he would abolish the IRS, I wonder how much support a policy to abolish the Inland Revenue would get in the UK

  4. eeyore
    Posted February 9, 2010 at 9:08 am | Permalink

    Insofar as higher tax rates mean lower tax revenues, and lower tax revenues mean smaller government, it appears, perversely, that Tories should support higher tax rates. By the same argument Labour should cut tax rates. Or am I missing something here?

    Reply: Yes you are – missing the point that we want to grow the size of the economy. We want more tax revenue, but for it to be a smaller proportion of your income. The state needs money for public services, but they need to be a smaller proportion of total incomes.

    • APL
      Posted February 9, 2010 at 1:35 pm | Permalink

      JR: "missing the point that we want to grow the size of the economy."

      Tories do want to shrink the size of the state, they do, don't they?

      • Lola
        Posted February 9, 2010 at 7:29 pm | Permalink

        Yep, and the 'State' is not the economy. It's an overhead. You can't get richer by growing your overhead. The 'State' only spends money it has coerced from its Citizens. Hence the citizens can't spend it themselves. No State activity creates wealth at all. The job we have given it is very simple. It has about four basic things to do. Defence, sound money, law and order and some infrastructure is best done on our behalf by the state and do that on the least possible money. The rest of it we can do for oursleves. We might also want it to act as insurer of last resort and to use its powers of redistribution to provide everyone with funding for education. That's it really. How hard can it be?

        • Robert K, Oxford
          Posted February 10, 2010 at 9:56 am | Permalink

          I like the economy/overhead bit. Neat.

        • Stuart Fairney
          Posted February 11, 2010 at 6:30 am | Permalink

          If you really want radical, there is no need for the state to be in the infrastructure or money business either. Defence and law & order for sure, along with perhaps upholding of commercial contracts.

  5. alan jutson
    Posted February 9, 2010 at 9:22 am | Permalink

    With free trade across State lines is it no wonder those who live a sensible travelling distance go to the lower taxed areas.

    The result is that you increase the trading population of your low taxed State but without the increased social cost of that purchasing population, by having to fund schools, healthcare, infrastructure etc.

    Whilst the higher taxed State has exactly the opposite, its infrastructure costs are the same as before, but with a lower trading population than before.

  6. Lola
    Posted February 9, 2010 at 9:35 am | Permalink

    Another reason to leave the EU with their dangerous totalitarian agenda to unify tax rates and end 'damaging tax competition'. Pah!

  7. Stronghold Barricade
    Posted February 9, 2010 at 11:28 am | Permalink

    I agree entirely with your content, but would add that the UK is subject to much punitive taxation

    tax on income…whether or not you can actually pay for it

    tax on property…whether or not you can afford to pay it

    tax on savings…generally where tax has already been paid once on the initial capital

    Add to that there is no incentive within the system for those bodies who demand and rely upon those taxes to ensure that they do not kill off the golden goose that allows their income…i.e. there is no competition for revenue, and they believe that if levels of taxation are levied then they will be paid and they will have the amount they want in their coffers

    Seems we have been in this situation before, and complaints can be traced back to an over burdensome state since the invasion of the Normans in 1066 and the setting up of the Doomsday Book.

    I want to know what the conservatives are actually going to do about fostering an accountable tax system, and what giant leap they are going to take to ensure that any future incoming legislature is confined withion fiscal parameters and can not embark on ruininous policies as we have seen in the last 13 years.

    I want to know with this "local accountability" if you are going to remove the property taxes and replace them with taxes that are fairer, but which also realise that the system must allow employers to invest and employ the local populace rather than the current punitive system.

    I also want a promise to ensure that gerrimandering, like the Barnet formula, will be abolished. Local accountability means living within the means of that area and using the resources available to bring employers into the area

  8. Lindsay McDougall
    Posted February 9, 2010 at 2:28 pm | Permalink

    John Redwood has consistently argued for lower taxes on the rich and for lower taxes on business, in order to generate economic growth and employment.

    There is nothing wrong with the arguement but we ordinary Joes (and Jos) also want lower taxes, and the only that will come about is by massive public expenditure cuts, going well beyond the elimination of waste. The State doesn't do anything very well. Even selecting our own wars (rather than those of America or Europe) and equipping our armed forces properly is beyond this government. So why not minimal government?

    Why is the NHS a sacred cow? Do we need regional health boards as opposed to allowing GPs and hospitals the right of free association? Why should we spend money treating heart disease or cancer in patients already suffering from dementia? Why are powerful expensive drugs, often with serious side effects that have to be suppressed by additional treatment, prescribed without a second thought? Why are doctors paid more than the law of supply and demand would indicate?

    Why is so much spent on social protection? It is argued that redistibution of wealth is essential to prevent crime by desparate people. What this ignores is that there is a very expensive overhead – public sector workers and the cost of the offices that they occupy – involved in redistribution. It is reasonable to assume that most peple would be better off if this were to be kept to a minimum.

  9. Matthew
    Posted February 9, 2010 at 4:23 pm | Permalink

    There is one other very big knock on effect: people with capital start and invest in new businesses. But generally, these are local to where they live and work (OK, exclude stock market investments etc.).

    So there is a hidden employment multiplier effect of flight from high personal taxation; you lose the high tax payers *and* the new business job creation that the high tax payers in turn create.

    As an entrepreneur, job creator and tax payer, I look at the increasing tax burden in the UK and consider whether I should be elsewhere…

  10. Mike Stallard
    Posted February 9, 2010 at 4:30 pm | Permalink

    OK, we are about to enter a time of austerity. I understand that.
    But, once we have paid off our debts enough to deal with the interest thereon, I hope we will cut all sorts of taxes.
    The Labour/Socialist/Leftie idea seems to be that everyone ought to be equal (=the same) because Equality is a Good that cannot be questioned.
    This is recipe for dictatorship. It is already obvious that the people who control the system have their own schools, their own private health, their own cafe where they can enjoy tobacco, their own class in the air, their own drivers and limos on the ground and they get expenses which they neither deserve nor can account for. Maybe they even above the law too. (Lord Levy?)
    If we believe in freedom, then we ought to start by offering the North, which is really suffering, a tax break so that people can start up their businesses there again.

  11. JimF
    Posted February 9, 2010 at 6:04 pm | Permalink

    Go tell it on the mountain. Maybe your leaders will eventually agree.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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