Edie Mullen
November 2016.

Is it true that lower tax rates result in a higher tax take?

1 answer

No. Trickle-down economics doesn’t work. All the empirical studies have shown that when you reduce taxes at the high end it doesn’t necessarily result in greater economic growth and therefore more taxable income. In fact, for various weird reasons, the pie actually gets smaller.

So would it be the case, therefore, that we should put extraordinarily high tax rates on wealthy individuals? That’s equally unfair. There’s an interesting psychology of taxation where, if you ask anybody who should be taxed more, they always say, “The people just above me.” Eventually there’s no one left, and the one group that the majority of people agree should be heavily taxed is the very wealthy. However, by and large these people didn’t steal the money they have, even if, in the post-crash world, we tend to treat them as thieves. I made a study of the bottom 100 of the Forbes 500 List and I found that the vast majority made their money themselves, out of something which didn’t exist before they came along. So the flipside of the question is, should we tax people like that as heavily as we can?

In recent years, people have done much more tax planning – legal avoidance of tax through pensions, ISAs, enterprise investment schemes and so on – because investment returns declined once interest rates came down. Where else can you get a guaranteed tax-free six per cent return? You’re not going to get it from the stockmarket or the bond markets and you’re certainly not going to get it from the banks.

What you’ve also got going on now is voluntary philanthropy, not just on the level of Bill Gates but lower down, a voluntary redistribution of wealth that’s breaking out like an epidemic. That seems like a good thing but a lot of wealthy people realise it’s also a necessary thing, because if they don’t give their money away voluntarily then somebody will come and get it off them.