Britain Raised Taxes On The Rich And Got Fewer Tax Revenues For Their Trouble

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If you tax rich people, you get fewer rich people. That’s what the Brits learned when they hiked taxes on their wealthiest citizens. Faced with higher tax rates, the rich (who are a very economically mobile demographic) reacted to the higher taxes by avoiding them.

Britain’s recent experiment with hiking taxes on the rich may have some lessons for the U.S.

To dig itself out of recession, Britain hiked its income-tax rate to 50% for those making more than £150,000 ($240,000). Proponents said the tax was needed to bring fairness to an economy, in which the rich were getting richer and not contributing enough to the cause. Critics said the tax would chase out the job creators.

As it turned out, the real impact was in tax avoidance. According to the Chancellor of the Exchequer’s budget announced today, the income-tax hike caused “massive distortions” that cost the government. A study found that £16 billion of income was deliberately shifted into the previous tax year. As a result, the tax raised only £1 billion – a third of the £3 billion amount forecast.

The big mistake the tax hikers always make is that they assume people will behave the same way at higher tax rates as they do at lower tax rates. As we can see from the example in Britain, this isn’t true. Higher tax rates change people’s behaviors in that they seek ways to avoid the tax. They find loopholes, or they move their wealth to avoid the tax. Or they just stop doing whatever it is that’s causing them to be taxed.

There’s a reason why the chart below from the Heritage Foundation looks the way it does. The 45 year historical average for federal tax receipts here in America is 18% of GDP. While raising taxes and other tax code manipulations can push revenues above that average for short periods of time, behaviors change in reaction to the taxes and the revenues call back down to average.

Put simply, the maximum amount of revenues our government can expect no matter how high they increase taxes is roughly 18% of GDP. Which means government spending shouldn’t be more than 18% of GDP if we expect a balanced budget. Currently, federal spending is roughly 25% of GDP, which is why we’re running annual budget deficits over $1 trillion.

We can’t solve America’s deficit problem by raising taxes.

Rob Port is the editor of SayAnythingBlog.com. In 2011 he was a finalist for the Watch Dog of the Year from the Sam Adams Alliance and winner of the Americans For Prosperity Award for Online Excellence. In 2013 the Washington Post named SAB one of the nation's top state-based political blogs, and named Rob one of the state's best political reporters. He writes a weekly column for several North Dakota newspapers, and also serves as a policy fellow for the North Dakota Policy Council.

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  • Jay

    Who would have ever guessed punishing productive behavior would lead to–gasp!–unproductive behavior? Why, it’s as if veteran leech and economic lightweight Karl Marx had no clue as to what the hell he was talking about. Let’s go back to the Adam Smith/Milton Friedman/F. A. Hayek economic model and see how well our economy recovers, shall we?

  • WOOF

    By your charts
    Between 2000 and 2011 revenue and tax receipts
    as a precentageof GDP have gone down.
    The era of tax rate cuts and the results.

    You’re calling for more of the same.

    You underestimate this nations ability to collect taxes.
    It’s why the world has it’s money here.

    • sbark

      The “world” has its money here because it still trusts the American people to be able to throw off the shackles of Liberalism and all its anti-business and anti private property regulations………..throw them off and be able to get the economy going again…..

      they were able to throw off FDR’s regltn burdens finally in 1947 to end the Great Dem’catic Depression of the 30’s and 40’s……

      They were able produce thru Jimma’ Carters severe recession, high int and high inflation.

      In summary………they still trust the Adults to fix the mess the adolescants make in the USA…………

      we’ll see………gonna take drastic measures this time…….Adolescants going to have to take off their diapers and do some growing up

  • mikemc1970

    Why do you think most of the rich and famous Brits live over here in the first place?

  • Econwarrior

    It’s a basic principle of economics that liberals are just unable to comprehend: when you tax something, you get less of it.  Capital flows to where it’s not punished.

    • WOOF

      You don’t comprehend what happened.
      The Brits threatened a tax rate hike .
      The rich went all in and threw their tax liabilities
       into the exchequers pot.

      Gov’t got the blood from the turnip.

      • two_amber_lamps

         “It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower rates….  73% of nothing is nothing”  Secretary of Treasury Andrew Mellon (1924)

        This man understood this fact almost 90 years ago… why do leftists have such a difficult time wrapping their tiny little heads around this fact?

        • WOOF

          This is a low tax nation.
          It’s always a question of who pays.

          • two_amber_lamps

             Regardless… the more the gov’t taxes, the more $$ will slip thru their fingers.  All we have to do is look back to our own history when tax rates were 70%+ for the top brackets.  Believe what you want, ignore history and wallow in ignorance….  it’s what the left does.

  • two_amber_lamps

    Don’t you hate those “Voodoo Economics?”  Who was this Laffer guy anyways??

    http://upload.wikimedia.org/wikipedia/commons/thumb/3/36/Laffer-Curve.svg/745px-Laffer-Curve.svg.png

  • SigFan

    My financial planner and I were talking the other day.  He handles the high end accounts for his firm and he was telling me that at least half of the people whose money he manages have directed him to plan an exit strategy for them.  In other words, plan a way to get their money out of here if the Bush tax cuts are allowed to expire next year (or if it looks like they will).  People with means will find a way to keep their money – even if it means taking it off the table entirely – happens every time.

  • WOOF

    UBS tax cheats found themselves in hot water.
    Your financial adviser/acct will be the first to give you up
    when an IRS agent steps into his office.

    • two_amber_lamps

       But if you’re a leftist politician or a bureaucrat, you’re golden….  Ask Rangle, Geitner, Kerry…. 

      Hell, ask your boy Tranni-tized…  El Kap-i-tan Tax Cheat!

  • sbark

    Same thing happening in Calif………….the rich Liberals are even leaving that Liberal Utopia
    http://search.yahoo.com/search?ei=utf-8&fr=slv8-yie9&p=calif%20rich%20leaving&type=

  • DopeyDem

    It’s amazing that the same drop in revenue occurred when the Dems took over power in 2006 that occurred when the country was attached in 2001. Both acts were involved in trying to destroy this country.

  • 2hotel9

    “Britain Raised Taxes On The Rich And Got Fewer Tax Revenues For Their Trouble”

    “journalists” keep screeching this as if it is news, or in some way “new”. This is simply an indication of their anti-America, anti-freedom, anti-capitalism ideology. Period. Full stop.

    • two_amber_lamps

       It certainly is “new” if you selectively delete history from the collective consciousness.  They ignore the past so they can paint whatever dim view of “capitalists” they want. 

      Oh silly leftists…  if the sheep would just look two inches beyond what’s printed in the MSM Failblog they’d see these bolshevik hacks for what they are.

  • schmuck281

    The same thing happened in Oregon. A Union-backed Initiative was placed on the ballot for a two-year “temporary” surtax on incomes about $200K. After a fierce campaign by Unions and the (Democrat controlled) State government, it won.

    Two years have passed and what were the results? The surtax raised about $1B less than was estimated and about one-third of the people reporting more than $200K in income disappeared.

    One blogger on the leftist Blue Oregon site admitted that many upper earners had reduced their income but said that it is probably a good thing because there are now less rich people.

    So, even though the surtax failed to raise the revenue that was the primary reason for its passage, it’s OK because we have eliminated some of “the rich?”

    You can’t make this stuff up.

  • Jeff

    Totally agree on the fact that spending habit change when you are taxed more and don’t have the income to do anything with it. If you were giving your kid $20 a week allowance and then decided to give them only $10 a week; they would probably spend buy less toys and candy. The rich who are mostly business owners are no different only on a bigger scale. The “toys and candy” cutbacks for them are jobs and revenue to other business through purchases. Every company I have every worked for has had a “rich” person running it. 

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