Forgive me for returning to a favourite hobby-horse, but it’s hugely frustrating — and sad — that two of the world’s great economies, the USA and France, don’t seem to understand the most basic issues on taxation.
In Washington we’ve been treated to the fiscal cliff-hanger — resolved for the moment, until they get down to the details. Obama has been demanding tax hikes for higher income groups. His colleague Senator Harry Reid, Senate Majority Leader, has insisted that “The rich must pay their fair share”.
Here in the UK, the top 1% of tax-payers contribute 27% of income tax, so you could argue that they’re already paying rather more than their fair share. I guess that the US figures are in the same ball-park.
In France, socialist President François Hollande is trying to deliver his election pledge of a new 75% tax rate on citizens earning over €1 million. He says this plan represents “Justice”. Quite how a disregard for property rights, coupled with confiscatory rates of tax, can represent “Justice” remains an open question. I can’t see it myself. And as it happens, neither can France’s Constitutional Council, which has ruled the plan as presented unconstitutional. But nothing daunted, the good President of the Republic plans to change the small print and try again.
Of course we all agree that “the broadest shoulders should bear the greatest load”. That’s achieved by a flat tax, where the man who earns ten times as much pays ten times as much in tax. That sounds more like justice than an arbitrary 75% tax rate.
The left, of course, is shamelessly exploiting public misunderstanding of the issue. It seems obvious that by raising tax rates, you can increase revenue. That would help us pay for all the services we want government to provide. And it would help us pay down debt. Wouldn’t it? Well no, it wouldn’t, in fact. All the evidence from dozens of countries over several decades is that beyond a certain level, higher rates fail to increase revenue, and may actually reduce it. That’s because the better-off divert time and effort from wealth and job creation, and concentrate on tax avoidance instead. They may hire a cleverer accountant, or move abroad, or decide a new investment plan is simply not worth bothering with. It may be counter-intuitive that higher rates deliver lower revenues, but it’s what actually happens. Not some high-flown theory, but demonstrable fact.
Funnily enough, David Cameron and Boris Johnson, who agree on so little these days, seem to have recognised this point at least. Cameron infuriated the French by promising to roll out le tapis rouge in Londonfor French entrepreneurs, while Boris delivered his invitation in the vernacular: “Bienvenue à Londres, mes amis”. And many are coming — and more are moving to Belgium, or to other lower-tax régimes. There can be no doubt that Hollande’s move will reduce French tax revenues. No doubt at all.
Of course Cameron failed to force the top UK income tax rate back to 40%. The current 45% is an unhappy compromise. I am satisfied that he and George Osborne understand the problem, and know what they ought to do, but were intimidated by Ed Miliband, and allowed a tactical political judgement to stand in the way of doing the right thing.
So are Obama and Hollande really ignorant of the basic facts of tax? Of course it’s possible that they do in fact understand the Laffer Curve http://en.wikipedia.org/wiki/Laffer_curve. It could be that their leftist mind-set just doesn’t let them admit reality. But I’d bet that they’re just ignorant.