There’s nothing exceptional about 50% tax rates

Left Foot Forward’s Declan Gaffney explains that, despite the media spin, there is nothing exceptional about the UK’s 50 per cent top rate of tax.

Twenty economists writing to the Financial Times (£) state:

“We are concerned that Britain’s 50p income tax is doing lasting damage to the UK economy.

“It gives the UK one of the highest personal tax regimes in the industrialised world, making it less competitive internationally and making us less attractive as a destination for both foreign investment and talented workers.”

In reporting this, the BBC website presents a table which seems to show the UK’s top marginal income tax rate is a lot higher than in all but two of the UK’s top eight trading partners, as well as Japan and Switzerland.

Why the top eight rather than the top 10? Well, China, which is number nine in the ranking of UK trading partners, isn’t in the OECD so consistent data on taxes may not be available. But the absence of Sweden, which is number 10, is harder to understand.

In any case, this doesn’t really matter because the data the BBC is using, while accurate, doesn’t show what it seems to be showing.

First of all, it reports only central government top marginal rates, when several of the countries involved have sub-national income taxes as well.

Indeed, had the BBC included Sweden on the same basis as the other countries, it would have had to report that for all its famously high social spending, Sweden’s top marginal rate is a postively Hayekian 25%, at which point people might have started to get confused. That’s the central government rate, but local rates range from 29% to 34%.

Secondly, the rates cited take no account of payroll taxes such as National Insurance contributions. In several countries these are still in play at the earnings level where the top marginal rate kicks in, and are obviously crucial in any assessment of the economic impact of marginal rates.

Fortunately the OECD also publishes an ‘all-in’ series on top marginal rates taking account of sub-national and payroll taxes. In Table 1, we’ve matched this data up with the BBC’s figures and included Sweden. Note that the top rate in the UK is 51%, reflecting the 1% National Insurance Contribution above the Upper Earnings Limit (2% since April 2011,but these figures are for 2010).

Table 1:

Top-marginal-tax-rates
From this table, six of the UK’s ten main trading partners have top marginal rates at or above 50%, or 49.8% if we want to be pedantic about France. Low top marginal rate countries are the exception among the UK’s main trading partners – Spain and the US – and even here top rates are 43%, considerably higher than the rates reported by the BBC.

As for Switzerland, libertarians would be well advised to look at payroll taxes and cantonal income tax rates before getting too excited about that purported low-tax paradise. So it looks as if a lot of the UK’s main export markets need to be excluded from the sample to back any claim it has “one of the highest personal tax regimes in the industrialised world”.

This gives another reason, were any needed, to second Duncan Weldon’s assessment:

“Of all our economic problems, they focus on the 50p tax.”

It also gives us an excuse to pinch his apposite quotation from the revered economist, Michal Kalecki:

“In this situation a powerful alliance is likely to be formed between big business and rentier interests, and they would probably find more than one economist to declare that the situation was manifestly unsound.”

Like this article? Sign up to Left Foot Forward's weekday email for the latest progressive news and comment - and support campaigning journalism by making a donation today.