As the battle over tax rates for top-earners escalates on this side of the Atlantic, the American media has largely ignored Great Britain’s recent tax-increase debacle. After sticking it to the rich by pushing top tax rates from 40 percent to 50 percent in 2010, Britain lost two-thirds of its millionaires and £7 billion in tax revenue. In response, Britain is dropping the top rate down to 45 percent next April.
The embarrassing announcement complements a March report by Britain’s tax-collection agency detailing the apparent negative effects of the tax increase (the first increase of the top rate in the UK since 1988). Concluding that there was “considerable behavioral response” to the tax increase, the report details how the tax hike stunted economic growth, caused substantial (legal) tax avoidance, and likely made the UK “a less attractive place to start, finance and grow a business.”
Wouldn’t the British government’s own admission that raising top-income tax rates actually reduced revenue and hurt economic growth be relevant to the current American tax debate?
One doesn’t even have to look across the Atlantic to see the negative economic effects of soaking the rich. California, with one of the highest tax rates in the country, has been hemorrhaging its population to more tax and business-friendly states at an alarming rate. The state’s comically high tax rates also didn’t prevent the unprecedented bankruptcy proceedings several large California cities earlier this year.
Nonetheless, President Obama and Congressional Democrats are willing to ignore economic reality in pursuit of “fairness” (which, unlike revenues and GDP, is an abstract concept and impossible to measure).
Obama summed up the left’s view perfectly during a 2008 debate performance. When questioned by the moderator on the historical fact that recent reductions in the capital gains tax rate resulted in greater revenue, while the last increase in the rate resulted in reduced revenue, Obama insisted that the rates should be increased anyway “for the purposes of fairness.” The “rich need to pay their fair share” meme continues to be a principal talking point on the left.
If your goal is to stoke class resentment among less-wealthy Americans for political gain, then the fairness argument is a winner. But if your goal is to grow the economy and increase revenue, Great Britain’s failed tax-hike experiment should offer a grim warning to Democrats and a reason to maintain some political backbone among Republicans.
At the end of the day, fairness doesn’t reduce the deficit; revenues do.