Fraser Nelson: wrong on cutting taxes for the rich

Fraser Nelson has a piece in the Spectator this morning in which he claims that the way to ensure the rich pay their way in taxes is to...cut their taxes. There is an elephant in the room, however.

Fraser Nelson has a piece in the Spectator this morning in which he claims that the way to ensure the rich pay a greater share in tax is to…cut their taxes.

“In 1987/88, the best-paid 1 per cent contributed just 14 per cent of all income tax. Once the top rate fell from 60p to 40p, the proportion paid by the richest 1 per cent soared to 21 per cent where it stayed.”

In other words, the rich are more inclined to pay taxes when they perceive them as fair. Low taxes also encourage an entrepreneurial dynamic which in turn creates wealth and therefore more higher rate taxpayers.

He produces a table to support his proposition:

The graph does indeed appear to show that as the top rate tax was reduced over time, so the proportion of income tax revenue paid by top rate taxpayers increased.

There is an elephant in the room, however, and that is the fact that as inequality soared in the 1980s and 1990s so the income earned by higher rate taxpayers soared too. This would, inevitably, mean that there was more revenue eligible for tax.

Another point (unrelated to Fraser’s point about the top 1 per cent but important all the same) is that there were more higher rate taxpayers at the end of the 1980s compared to the 1970s. See the third column from the right in the below graph.

Higher rate taxpayers

Very few people paid the 60 per cent or 83 per cent higher tax rates. In 1979, 2.6 per cent paid the higher rate. In 1989 6.1 per cent did so, and so on. As there were more higher rate taxpayers, and as the top one per cent saw their earnings increase, there were higher revenues, obviously.

This is a far more satisfactory explanation than one offered by Fraser.

9 Responses to “Fraser Nelson: wrong on cutting taxes for the rich”

  1. LB

    And yet the poor still get richer compared to where they are.

    Now the poor are getting poorer.

    The middle class are getting poorer

    The rich are holding on.

    It’s the new trend.

    Governments will screw people into the ground because of their hidden debts.

    5,300 bn of pension debts off the books.

    Since you can’t pay that, even by taxing the rich 100% of income and wealth. you’ve condemned the poor to destitution.

  2. Stephen Hildon

    Yes simply put the top 1% is earning a much greater share of the national income today compare to 25/30 years ago and therefore will be paying more tax, even when their rate has dropped.
    The reason why the 50% rate lost money was because it was announced it was being scrapped and the 1% who in many cases are the one in control of their own pay were able to defer a large proporation of their income to the following financial year when the 45% rate kicked in.

  3. Tim Worstall

    Erm, Helloo? This is reality calling.

    The argument at the time was that if top tax rates were lowered then those who could earn more money would be motivated to go and do so. You have shown that when the top tax rates were lowered those who could earn more money seem to have found the motivation to go and do so.

    As a proof that lowering marginal tax rates work I would take your argument to be pretty good actually. As a proof that it doesn’t I’d say it’s rather weak.

  4. Newsbot9

    The rich are getting richer at ever-faster rates. Thanks for your lies, though.

  5. Newsbot9

    No, it shows that wealth has increasingly concentrated in the rich and the tax take has fallen as a result. Moreover, you’re ignoring the falling % of GDP paid as salaries…a trend which is only increasing.

    That’s all it shows, your ideological claim has no evidence.

  6. LB

    Lets tax the poor more. That will make them rich.

    After all you’re claiming the rich are getting richer, but tax rates have gone up.

    Why don’t you do what you think works for the poor? Tax them to make them richer?

    Ah yes, meejah studies

  7. Tim Worstall

    “ignoring the falling %ge of GDP paid as salaries”. Erm, I’m the guy who actually did the numbers on this to show that Howard Reed and the TUC were talking tosh.

    There has indeed been a fall in the %ge paid in salaries. That’s because employer paid national insurance has been rising.

    And there’s been a fall in the wage share too: because VAT has been rising, not because the profit share has been rising.

    Given that I did actually go through all of these numbers, publish the conclusions in several places, acusing me of “ignoring” the point really is quite wonderful.

  8. Newsbot9

    No, you’re not the source of the figures I am using.

    It’s fallen quite sharply.

  9. Newsbot9

    Yes, thanks for admitting your agenda. Arbeit Mach Frei reasoning.

    The rich have got richer because tax rates have been cut in many places, and are still near-historically low, especially on capital. Your idiotic attack against the poor shows how little thinking you do in your shilling.

    Creative Media. Which is not media studies. But facts escape you.

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