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Misadventures in Progressive Taxation: UK Edition

3 min readBy: William McBride

The U.K. is now reversing course after raising taxes on high-income earners failed to bring in the projected revenue:

George Osborne has delivered a Budget that ‘unashamedly backs business’, slashing the top rate of personal income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. and accelerating corporate tax cuts.

After months of speculation and rumours of coalition rifts, the Chancellor has signalled the end of the controversial top rate of income tax. Currently charged at 50% on all income over GBP150,000, from April, 2013, the rate will drop to 45%. In his Budget speech, Osborne slammed the rate as the highest in the G20, stressing that he had always seen it as a temporary measure, and one that can only be justified if it raises “significant” revenue.

Turning to the publication of HM Revenue and Customs’s (HMRC) report on the top rate, Osborne said that it reveals that the tax has “caused massive distortions”. He explained that “an astonishing GBP16bn of income was deliberately shifted into the previous tax year – at a cost to the taxpayer of GBP1bn, something that the previous government’s figures made no allowance for. Self-assessment receipts this year are below forecast by some GBP3.6bn, while other tax receipts have held up. The increase from 40p to 50p raised just a third of the GBP3bn we were told it would raise.” Ultimately, Osborne insisted, “no Chancellor can justify a tax rate that damages our economy and raises next to nothing. It is as simple as that.”

Mr. Osborne, imagine how little a millionaire surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. would raise. The Joint Committee on Tax recently estimated that the version Senate Democrats put forward would raise only about $5 billion per year. That’s less than half of 1 percent of the current year’s deficit. Based on the U.K. experience, we should perhaps discount that by 2/3rds as well.

Essentially, a millionaire surtax can be expected to raise a negligible amount of money. It might even reduce revenues as result of its stultifying effect on economic growth, particularly in the U.S. where the majority of business income is taxed under the personal code.

Having learned that lesson, the U.K. is moving to reduce their corporate rate as well:

Along with demonstrating the simplification of the country’s tax system, Osborne intended to offer another major signal to businesses that the UK offers a competitive tax system through a reduction in the corporate tax rate. The government had originally intended to reduce the headline rate to 23% by 2014, but Osborne will now accelerate the process, and deepen the cut. At present, the rate stands at 26%, following a surprise 2% cut in last year’s Budget. Osborne has now repeated the 2% reduction, taking the rate to 24% instead of the 25% planned for April. Two further cuts are planned over the next two years, with the end result being a 22% corporate tax rate by 2014. Osborne said: “The biggest sustained reduction in business tax rates for a generation. A headline rate that is not just lower than our competitors, but dramatically lower.”

That means the U.K. will tax businesses at about half the rate that we do in the U.S., where the combined corporate rate is about 40 percent – the highest in the OECD.

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