There are two more letters in the FT that are of sufficient public importance to be reproduced in full given the importance of the 50p tax rate in current debate.
The first says:
Sir, I assume the group of economists who are calling for the abolition of the UK's 50 per cent tax band (Letters, FT.com, September 6) have carried out the necessary research to support their arguments. The required evidence would be: what proportion of those falling into the highest tax band are actually “highly talented entrepreneurs”, as opposed to the “business people” who got us into the financial mess we are suffering in the first place, and what proportion of these genuine entrepreneurs have now fled the country?
Perhaps one of the professors could answer these questions. Without credible answers their letter will simply be regarded as an ideological petition in favour of the very rich.
Ian Rutledge, Hon Senior Research Fellow, School of Management, University of Sheffield
And the second is more important still:
Sir, My colleagues' letter (September 7), which argues that the UK should abolish its 50p income tax rate, cites no evidence. Such evidence exists. It is not favourable to the authors' case.
The best-designed recent study, which also gives references to the research literature, is “Millionaire Migration and State Taxation of Top Incomes: Evidence from a Natural Experiment” by Cristobal Young and Charles Varner in the 2011 National Tax Journal. The authors examine what happened when New Jersey abruptly raised its income tax rate on those people with incomes above $500,000 a year.
This is a helpful case study for those who wish to think about the design of UK tax policy because although the rise in the tax rate was fairly small, the authors' statistical analysis is an unusually careful one and because it is easier for a person to move 30 miles from New Jersey to Pennsylvania (where the top rate of tax is then immediately 6 percentage points lower) than it is to move from the UK to another country.
The study finds that the effect of the New Jersey “natural experiment” was, in the authors' words, minimal. Yes, the data reveal that there was some out-migration, but it was tiny. Moreover, the migration occurred among the retired and those living on investment incomes. The study did not find that entrepreneurs were pushed out of an area by a rise in the top rate of income tax.
Andrew Oswald, Professor of Economics, University of Warwick, UK; Senior Advisor (Research), IZA Institute, Bonn, Germany
In other words, pensioners move in retirement, which is hardly news: they always have. Entrepreneurs and people in employment hardly do at all, based on a very large survey of data, a serious tax increase and the opportunity to avoid it by moving 30 miles down the road.
Shall we now say the case is closed? And that the 20 economists who wrote to the FT were wrong?
But will the BBC now give prominence to that fact? That's the question.
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Very good find from Andrew Oswald, that article.
Just to back up Ian Rutledge’s point: the idea that the 50p tax rate “discourages entrepreneurship” betrays a total misunderstanding of the way the UK tax system works anyway. As far as start-up companies go, most entrepreneurs make their big money (if they make any money at all) through being bought out by larger companies – or, less commonly through selling their stock in the company when the company floats. In both of these cases, the big money is made through disposals of capital, not income – and the top Capital Gains Tax rate is 28%, not 50%. If you’re an owner of a small company then there are additional entrepreneurs’ reliefs, so your CGT bill is even less than that.
Whether the top rate of CGT should be higher than 28% is a separate issue – personally I think it should be, and give due credit to the Coalition for increasing it from 18% under Labour. But the fact remains that any economist suggesting that the 50p top income tax rate is a “barrier to entrepreneurship” either doesn’t understand the tax system, doesn’t understand entrepreneurship, or else is deliberately misleading people.
You’re right as usual
These were points I made on PM the other evening
Lawrence Lindsey publishes a study in 1987 on Reagan tax policy 1982-4, peer-review finds it to be inconclusive because of the range of variables involved, and 24 years later the ghost of ideas past still stalks the earth. I think they should put the higher rate of income tax up to 60% in memory of the Thatcher years, or above 80% as in the 1960s when the UK economy grew at its fatest rate of any decade in the UK’s history. Or maybe 98% as in some of the Atlee years when ‘we were all in it together’. Just saying.
You might want to link to Simon Jenkin’s colomn in the Guardian while you’re at it.
tweeted it
I’ve also added Jenkins’ link in a response to one of your earlier blogs.
Just read the Young and Varner paper Oswald cites. A sound piece of research, as he says. It also exposes the letter from the “band of 20” for what it is – political grandstanding in the extreme. Additionally, taken together with Ian Rutledge’s clear statement of what their underlying research question should have been (but wasn’t), it exposes the complete lack of academic rigour in their work. I certainly hope that any students currently studying with them – or thinking of doing so – take this into account when designing and conducting their own research.
Actually any students studying with these economists would be well advised to change to other supervisors if they have registered for a research degree!! I doubt whether they would receive any positive advice about their research question and proposal.
Migration of entrepreneurs is a complicated thing to measure accurately and with confidence. There are so many factors that cause an entrepreneur to move country. Taxation is an important one of them, but there are so many more.
Your article above is clearly biased. No, the case is not closed. More research is needed (and may have already taken place). If you can collate this evidence from a neutral point of view, that would make valuable reading.
Neutrality is not possible
Only neoliberals are fraudulent enough to claim they are neutral – but of course they are not. It is just another of their fantasies
Neutrality may not be possible, but we should at least strive to get close to it by keeping an open mind and, most important of all, search out the truth.
If we know the truth, we will be able to choose the best policy.
But what is the truth? In social science it is all relative.
What we actually need is the wisdom to make the best decision against ethical criteria when we only ever have partial data on which to base our judgement
The last lot to use the tactic “more research is needed” was the tobacco companies when they were still trying to pretend that smoking didn’t cause cancer.
Anyway, these so-called private sector entrepreneurs are the same people who gave us a failed housing sector, a failed pension saving sector, failed manufacturing sector and a colossally failed banking sector. All despite state help in the form of massive tax subsidies and/or a rigged market place plus bent regulation.
The only sector where the market isn’t rigged is heath care but the private sector has failed lamentable to offer comprehensive and cheap treatment system. Instead, it sponges off the richest of the unwell and practically ignores everyone else’s needs.
I forgot to add education as another sector where the private sector has failed lamentably to provide a universal, high-standard and affordable service for everyone at low cost, despite tax subsidies and rigging the assessment criteria.
I wouldn’t call property developers entrepreneurs. Neither bankers.
Real entrepreneurs create value. Real entrepreneurs innovate. Real entrepreneurs tackle problems to find solutions. Entrepreneurship is the solution to raising living standards, growing an economy and empowering people to make the world a better place.
Oh, and look at who’s letter continues the debate in today’s FT – that old fraud Patrick Minford.
Minford?
A fraud?
Really?
🙂
I just wanted to point out that the second quote is actually quite misleading when it says: “The study finds that the effect of the New Jersey “natural experiment” was, in the authors’ words, minimal.” That couldn’t have been further from the truth in respect of the tax revenues that tax brought in.
The study actually concluded more substantially that about 70 tax filers would have left the state, costing it an estimated $16.4m in tax revenue from 2004 to 2007.
The actual result however was a revenue gain of an estimated $3.77 billion over the same time period. Thus the tax was an unimaginable success that shouldn’t be downplayed seeing as the opportunity for out-migration was so easy due to the nearby states with lower tax rates.
On this report (http://www.cbpp.org/cms/index.cfm?fa=view&id=3556) there are some interesting notes about how the right wing media and politicians reacted to these findings and how they used it as a case that the tax didn’t work even though it clearly did.