What tax rate is too high?

I was on Iain Dale’s LBC radio programme on Sunday, talking about Labour’s tax policy. I said I was in favour of a mansion tax in principle. Jonathan Portes, of the National Institute for Economic and Social Research, was also on and explained why a land tax (of which a mansion tax would be a progressive form) was economically efficient, so I agreed with him.

But we were diverted into a discussion of Francois Hollande (pictured), and whether a 75 per cent tax rate on incomes over €1m (£870,000) a year would really stifle an economy such as Britain’s or France’s. (Note that the French finance minister on Monday hinted that the new tax on the richest might not be at a 75 per cent rate after all.)

At which point my secret inner Blairite (did you know?) was activated. I said that, while a 50 per cent rate was acceptable in an emergency for a short time, it was the limit. I was slightly surprised to discover that I had a philosophical rather than a revenue-maximising objection to tax rates above 50 per cent.

I think half for the common endeavour and half for the individual is a high as tax should go. In which case, my principle is being breached, and by a Conservative-led government, as the top rate of income tax is currently 52 per cent (income tax and National Insurance combined) and, taking the tapered withdrawal of the personal allowance into account between £100,000 and nearly £120,000 a year, 62 per cent. (The philosophical objection does not apply to combined rates of tax or NI and benefit withdrawal, because cutting benefits received from public funds is not the same as taking someone’s own money away from them; but high rates of combined tax and benefit withdrawal are obviously undesirable on incentive grounds.)

On this, I have changed. I remember being amused around 1988, when Nigel Lawson cut the top UK rate from 60 per cent to 40 per cent, by an American student, who seemed quite well-off, declaring that she would feel “absolutely suffocated” by a tax rate of 60 per cent.

Now I think she had a point.

Footnote

It emerged from an ensuing discussion that some people do not know or believe that the top marginal rate of income tax under the Callaghan-Healey government 1976-79 was 98 per cent.* Denis Healey raised the top rate of income tax from 75 per cent to 83 per cent, and then applied an “unearned income surcharge” of 15 per cent on interest. The 15 per cent investment income surcharge was abolished (page 8 note 4) only in 1984. Nor had I remembered that the top rate of normal income tax had been 75 per cent for years before that, including throughout the 1970-74 Conservative government.

*Nor was 98 per cent the highest-ever marginal rate in the UK. The HMRC website says this was 136¼ per cent on interest income in 1967-8. I doubt if anyone paid it.

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• snozzle123

  Capitalism lurched from crisis to crisis in the 19th century and early 20th century. The drive for state intervention, growth of state provision, was actually necessary to aid capital accumulation. There were several ‘crisis of capitalism’ in the 19th century when things looked grim, and the whole capitalist system almost tipped over. I’m not writing a hymn for state planning more criticising the idea of the ‘free market’. Money is a commodity necessary for the ‘free market’ to function, if it falls over you have systematic failure. How long until the ‘free market ‘recovers’? A month? A year? 200 years? Hayek is criticising a certain sort of state planning, but it’s not either/or; the market is as much a human construct as any state.

• HJ777

  “The drive for state intervention, growth of state provision, was actually necessary to aid capital accumulation. There were several ‘crisis of capitalism’ in the 19th century when things looked grim, and the whole capitalist system almost tipped over.”

  Evidence for this please. Assertion is not evidence.

  I think that what you fail to understand is that capitalism is not a “system” – it evolved. Solutions evolve to solve problems within a free market. Neither is designed – they are the products of free will. Anything else requires a degree of coercion and you have not established that coercion produces better results.

• snozzle123

  I used to believe that but the state is no less a construct than a ‘free market’. We would like to believe one is natural the other unnatural but both are ultimately constructed and contingent, it’s a false dichotomy This idea that there is a an ‘individual’ who exists antecedently to society…in a ‘natural’ state, and makes ‘free’ choices, is a fiction of early Enlightenment thinking. Nobody has ever met or seen this person. Research on language and philosophy of language shows everything we do involves a dialogic aspect. We cannot just ‘create’ ourselves monologically and that includes ‘choice’.

• HJ777

  “I used to believe that but the state is no less a construct than a ‘free market’.”

  I didn’t suggest that the free market is a construct, so I fail to see what your point is.

  Nobody is suggesting that a “free market” is some sort of ideal, pure, thing or that it ever could be. Markets are rarely, if ever, 100% free. They are imperfect by nature. The argument is simply that they are better than an imposed system that is, by design, deliberately “unfree”.

  Your reply doesn’t provide any evidence for your previous assertions, by the way.

• snozzle123

  You were contrasting the ‘natural’ market with the ‘unnatural’ state. Unnatural/natural is a false dichotomy. A ‘free market’ might exist in the absence of the state doing planning but it doesn’t mean that a ‘free market’ isn’t the product of power relationships and forms of power other than direct coercion, such as Foucault talks about in his writings. Besides even the state consisting of social institutions is more consent than direct coercion, you can’t keep guns pointed at people all the time. It’s not so simple when you think about it. Classic liberal thought with this idea that a ‘free market’ exist in nature prior to a state is rubbish. If you are talking about ‘evidence’ then show me a ‘natural man’ as say Locke conceived of him?
  1848 was a close call for the Capitalist system with all sorts of political upheavals. It wasn’t all growth in Britain in the 18th century, you had the railway bubble burst in the 1840’s and recession in the 1870’s? I think. Of course then you had the Great Depression in the 1930’s. One theory is the state steps in as a necessity to aid capital accumulation. Business takes the line of least resistance. Why compete in a ‘market’ when you can get a quasi-monopoly via state licensing or provision? Capital likes stability and certainty we are told.