Is there much left to tax?

On Tuesday at Conference I spoke to a Policy Exchange audience about taxation. I explained that we needed to maximise receipts from existing taxes to help bring the deficit down. I argued that current rates of CGT and Income Tax will not do this.

I reminded people about the work I did, and the Adam Smith Institute did, at the time of the CGT debates. The evidence from the USA and the UK suggests strongly that a rate no higher than 20%, and maybe as low as 15%, is needed to maximise CGT receipts. The Chancellor, in his budget, for the first time committed the Treasury to the view that tax revenue does fall off above a certain level of tax. Clearly if you set a 100% CGT rate you would collect very little.People and companies would await a lower tax and lobby like mad for it. The evidence shows CGT revenue has usually fallen after increases above 20%. The Treasury says 28% is around the perfect rate. I beg to differ.

The same is likely to be true of the marginal rate of Income Tax. In a footloose and competitive world no country can get away with unduly high marginal rates of Income Tax. People and businesses simply relocate to avoid them. I suspect 50% is above the optimum rate for collecting maximum revenue. Doutbless the perfect rate is higher than the 15-20% for CGT, but is unlikely to be above 40%.

On the same platform with me was David B Smith. He presented some new figures he has been working on, to argue that the UK as a whole is now on the wrong side of the Laffer curve – that its total tax rate across all taxes is too high to optimise the revenue. He is as critical of plans to raise VAT as the rest of the tax rises.

What is worrying about his numbers is the state of the UK economy they reveal. The government sector has risen by 15.9 percentage points as a share of national output in the last decade. This was the largest such rise in the OECD and the biggest ever such rise in the UK in a single decade. Mr Smith thinks it makes a UK recovery that much more difficult. With the government taking more than half of national output, the tax squeeze on the productive sector is very great.


  1. P H
    October 7, 2010

    Capital gains tax without allowing indexation against inflation is taxing people on money they have not actually made. With tax rates as now you will have to do very well indeed with your investments just to keep you money worth the same as it is now so why take the risk.

    I would put top rates at about 15% for CGT with indexation allowed and 30% for income&NI combined and Inheritance Tax should go. This would actually generate more tax and encourage more taxable activity into the country and more investment from outside and fewer to leave.

    Why can the "experts" at the treasury not see this, the evidence for it is very clear indeed.

    Certainly several orders of magnitude more certain than the great global warming computer exaggerations they are wasting so much money on.

    1. Alan Jutson
      October 7, 2010


      The "experts" at the Treasury are mainly PAYE, are paid for by the Taxpayer, many have never generated any wealth with their own skills, invested their own money, and have little experience of the hard nosed Business world of risk and reward.

      This perhaps goes some way to answering your question.

      They simply do not understand that if the risk is not worth the reward, then why bother risking anything at all.

      They all get paid no matter how they perform, as they work for an organisation which does not need to find customers, has no research and development costs, does not have a competitior in the same business, does not have to make a profit, and can legally demand payment for services often not rendered.

    2. Iain Gill
      October 7, 2010

      yes but it should also be possible to outlaw some of the more obvious corporate structures which do nothing but move earnings generated in the uk to another tax jurisdiction for tax purposes

      the number of skeleton companies in places like Mauritius where the bulk of the earnings are moved for tax purposes is ridiculous, and i can point at companies using these wheeze regularly

    3. Lola
      October 7, 2010

      Let's get this straight – CGT is NOT a tax on capital at all, it is a tax on income. There is only one asset class that exhibits true capital gain, and that is equities. (increases in property are generally driven by inflation and/or scarcity – hence the need for indexation). The price of a share represents the future discounted value of the income stream, hence the value of a share risesd as the company makes more money. Hence CGT rates should equal income tax rates – if you are going to tax either, and I don't think you should tax eaither at all!

    4. Mark
      October 7, 2010

      You are quite right. It is a highly swingeing wealth tax on the realisation of long held assets with a very low threshold of wealth. If we get high inflation, then it becomes a wealth tax on even shorter term holdings (which inflation is anyway).

  2. Nick
    October 7, 2010

    he government sector has risen by 15.9 percentage points as a share of national output in the last decade.


    And you are still advocating increases in spending.


  3. Acorn
    October 7, 2010

    JR, please can I plug your video on the subject at Policy Exchange? I recommend it for Redwoodians.… .

    For David B Smith fans, have a look at his original piece on the subject for IEA.

  4. oldtimer
    October 7, 2010

    The Treasury claim that 28% is the "perfect" rate is manifest rubbish. It was set at that rate for administrative convenience – HMRC could not be bothered to adopt your sensible proposals.

  5. electro-kevin
    October 7, 2010

    Slightly off topic but about taxation nonetheless.

    I was dismayed to hear that Mr Cameron refered to those on £44k in these terms (or something similar) "… though I agree that those on £44k are not super-rich… "

    The truth is that we're not 'rich' by any stretch of imagination – not those of us with families in the south or south west, especially if a commute to work is necessary.

    A 4x salary mortgage gets you a £200k property (minus deposit) – a small flat in a dodgy London area if you're lucky.

    The reality of the £44k family lifestyle where I live is an old car, an overdraft, a council type property surrounded by people on some form of benefit all seeming live better than you do. No foreign holidays – or does Mr Cameron think that camping among the middle-classes is in vogue because we like it ?

    We're all in this together is the rallying slogan … but some of us are more in it than others.

    1. StrongholdBarricades
      October 7, 2010

      House prices are a hang over from the uncontrolled housing boom over the tenureship of GB.

      The fact that it is also more difficult to obtain a mortgage may also have a lot to do with the light touch regulation of GB

      You are conflating different issues and different problems as if they were related and the state has a duty to ensure that homes are affordable.

      Thus to that end a state which brought housing prices down, or stopped them rising, would actually make them more affordable to everyone.

  6. Richard1
    October 7, 2010

    A pity to hear George Osborne justifying retaining the 50% rate on the grounds of 'fairness', that ubiquitous term used by politicians – generally on the left – to impose taxes, spend the public's money etc. If, as seems increasingly clear, the 50% tax rate will lead to diminished tax receipts, then the policy is 'unfair' as it means less will be available for public services. Mr Osborne should decide what he believes and have the courage of his convictions to follow through with it.

  7. Jim Cooper
    October 7, 2010

    Dear Mr Redwood,
    Over the last two days I have heard nothing but vitriol from friends and family, erstwhile Conservative voters, over the random unfairness of the Child Benefit cuts. I hope you can convey to Messrs Cameron and Osborne the very strong feelings of the core support, not just over the cuts per se, but the nonsensical discrepancy between the one/two earners in the family. And also the concern over the effect on a woman's State Pension qualifying years. None of this reflects well on the Maths Department at Eton.

    1. Andy
      October 7, 2010

      Damn right Jim! JR says he will let them know the views of his constituents, lets hope the view he shares is that we are "(flipp)ing Furious".

  8. StrongholdBarricades
    October 7, 2010

    With regard to taxation, I believe your point is only one piece of the arguement.

    The fact that there is a tax on wealth creation at all is surely an abomination because it directly impacts upon future growth of the economy.

    The issue around avoidance etc, might also mean that more money does flow into the wider economy.

    I do not accept that taxation should be progressive, because it means that those with the most money are more likely to find ways of avoiding taxation. Someone on the median salary is unlikely to be able to afford the fees or receive enough benefit from tax avoidance schemes.

    If we were to follow your example, the level of income tax would be flat at about 18% for everyone, but there would be a personal allowance of about 10k because taxation falls hardest on those with the least.

    Fairness and outcomes?

  9. adam
    October 7, 2010

    It is disappointing that a Conservative Government cannot see the obvious. In a market in which businesses are struggling to do well together with the increased competition from the likes of India, China and Brazil, we continue to raise taxes – where is the asipration to come from that cameron talks about if we are going to hit busnesses and individuals with an increased tax burden??

  10. Robert
    October 7, 2010

    So true, but why does the Conservative government still feel the need to talk about austerity rather than prosperity? How about this: "Our over-riding aim is to allow an enterprise economy to evolve, based on a highly competitive tax regime, deregulation and localisation. We welcome wealth creators to the UK and rejoice in those on the lower rung who aspire to achieve more. We believe that tax should represent a much smaller proportion of national income, but in a thriving enterprise economy there will be no need to cut essential public services. We applaud hard work and deplore state-sponsored idleness. The UK was the birthplace of the industrial revolution to history’s greatest free-market philosophers: our job is to get out of the way of that process re-inventing itself after 13 years of Labour miss-rule.”

  11. Lola
    October 7, 2010

    Stuff the Laffer curve. You appear tbe using that to justify taxing us at that level. How about just trying not to tax us at all! Broadly, unless something ultimately needs enforcing by violence the State has no business doing it. Hence there is massive scope to get the State out of whole areas of our lives and leave us to spend our money as we want to. We'll do it a whole sight better than you and your lackey bureaucrats ever will.

    Look at the Laffer curve the other way around. Assume that is the maximum that you ever can have and seek to reduce taxes below that each year.

    Personally I reckon the ancients had it about right. Tithes work for me. And I'd do that with LVT rather tax wealth creation through IT,CGT,VAT, etc etc

    1. randomnoise
      October 7, 2010

      I agree except: all those tithes on factories and workers homes present a cost to production, which will appear in consumer prices as a hidden tax. There is no getting away from it, the consumer pays in the end.

      Does increasing income tax increase the cost of employing a worker? Will he sit idly by and accept a loss of net pay? Or does he have some market value that led to his particular disposable income in the first place? The employment market will eventually settle again and the distribution of personal disposable income based on individual commercial worth will tend to revert to the norm. For now the tax hike immediately increases the hidden tax content of goods and services, but with time a consequent rise in consumer prices is inevitable.

      These tax hikes are short term money grabs by statists seeking easy political approval from a deluded populace.

      If VAT was 100%, would voters think that reasonable? Yet that is the equivalent rate that would replace all current taxation; surely a sobering figure for any voter! To get it down to a "reasonable" 30% is simply not going to happen is it, because statists can never admit that we could live our lives more prosperously without their interference. So it is better to keep the cursed income tax in all its manifestations so that the voter is kept properly befuddled.

  12. Mark
    October 7, 2010

    Perhaps a PQ might elicit some data from HMRC that could shed some light on things. Certainly the recent high levels of monthly deficit suggest that taxation receipts aren't holding up to forecast levels. Unfortunately, CGT data won't be available until after there are completed tax returns for the current tax year – so some other method of estimation would be needed.

    There may be some short r0r influences, such as landlords deciding to sell up portfolios in the face of declining prices and the threat of reduced rents from lower housing benefit payments – although there is little sign of that at present bend a tightening of rental markets, suggesting properties being withdrawn for sale.

    reply: the bigger problem has been the large increase in spending

  13. Conrad Jones (Cheam)
    October 7, 2010

    Of Course there is John, and in a way that will make everyone winners.

    Am I right in thinking that a Bank could actually charge less interest on a Loan than it pays out on a Savings Account?

    Example: Deposit £100 in a Bank. The Banking System can then loan out £900 as the total Demand Deposits are £1000 with 10% in reserve and 90% (Excess Reserves) out to Borrowers.

    Say the Bank charges 4% for the Loan, and pay out 6% on the Savings Account. They actually only pay 6% of £100 , and receive 4% of £900.
    That is: they pay £6 to a saver and receive £36 from the borrowers. The increase in Tax Revenue would then help pay off the Debt and Boost the economy would it not?

  14. Conrad Jones (Cheam)
    October 7, 2010

    (continued from my comment above…)
    The Increase in Savings Account Interest Payments will be taxed. Although it looks like the Savers would once again end up paying more Tax, they would also recieve more income from their Savings. This increase in their income would encourage spending on Goods and Services provinding private sector employment. More people would be encouraged to save money thereby increasing the available money for borrowers. No need for Quantitative Easing. Maybe this is what Charles Bean (BoE Deputy Governor) was implying.

  15. Conrad Jones (Cheam)
    October 7, 2010

    The Downside of this is that Labour (New or Otherwise, or even "Born Again Labour" if Ed Milliband has his way), will say that the Goverment is yet again increasing Taxes to the poor savers. The Good Part is that very few Savers will complain and Labour will be seen for what it is – hiding the Truth about their complete Incompetence over the last ten years.

  16. Pool Tables Expert
    October 7, 2010

    Agree completely JR. It is sensible logic that there is a curve where the return reduces. When rates came donwe in the eighties, did returns go up? If they did its a proven argument, so why will the treasury not accept it and implement the lower rates. It brings in more money. They will get criticism but they get that anyway. And they have 5 years to prove that they are right.
    Get on with it.
    On other matters I am generally impressed with some honest straight talking from the government this week. Well done. Now get the tax reduced.

  17. FaustiesBlog
    October 8, 2010

    Indeed. Once the tipping point has been reached (different for each sector in society), the rich will employ clever accountants or leave the country should they fail to find any – and the rest of us will find ways of entering the black market.

    We will avoid paying VAT by bartering and buying from markets. We will avoid paying income tax by finding income streams that pay cash.

    And what will be the government's response? Will it clamp down on the rich? No. It will probably make bartering and market trading more difficult. I.e., it will take the easiest path while appeasing its palm greasers.

    So the government will find its tax receipts reduced via its tax heist and will then … put up taxes and bring in draconian controls.

    Heads they win, tails we lose. And by "we", I mean the clobbered middle classes.

  18. Conrad Jones (Cheam)
    October 9, 2010

    Perhaps what we are really saying here is that everyone should pay less taxes, as – to say that increasing taxes from wealthy individuals or Companies would only result in more clever ways of avoiding those taxes – by implication; suggests that the Taxes to other groups in Society would have to be increased to make up the shortfall. Big Government obviously does not work as it requires huge amounts of Tax to pay for it. An Individual will always spend their own money far more wisely than they spend other peoples – Government Spends other peoples money.

    'Joke': Outgoing chief secretary to the Treasury Liam Byrne left a note saying 'there's no money left'

    In a stark message left in a Treasury desk for his successor, outgoing chief secretary to the Treasury Liam Byrne wrote simply: "I'm afraid to tell you there's no money left."

    Is Liam Byrne's attitude common amongst Treasury Ministers?

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