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.