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Over-taxing the rich hits the poor

Posted by Richard D North in Money / Politics / Society on 29 November 2008

Why we posted this: It really matters that there’s no point hammering the rich. It doesn’t hurt them and may hurt the poor.

The original stories:
Top rate tax may not raise a penny
Hamish McRae
The Independent
26 November 2008

How ‘Reaganomics’ tax cuts can raise revenue
 Janet Daley
The Daily Telegraph
25 November 2008

Summary of the stories:
Two writers respond to the Labour Government’s reversal of its 10-year policy of not treating the very rich differently from ordinarily well-off middle class taxpayers. Hamish McRae reminds us that there seems to be a “tipping point” with tax. Push the overal tax of an individual over about 60 per cent and the operation is counter-productive. The very rich (the top one percent) already pay a quarter of the nation’s tax take. But they are flexible types: “over-tax” them, and they have all kinds of ways of fighting back. 

Janet Daley reminds us of the other part of the equation. It’s called the “Laffer Curve“. The rich don’t like being over-taxed and part of their defensive reaction may lead to a decline in national income, sometimes beginning with their own (as they decide to retire sooner than stump up, say). That’s bad in itself and leads to lower tax revenues. (JD notes that some circumstances can change these assumptions.)

livingissues comment:
There may be all kinds of merits in left-of-centre political policy. But the left are not always right when they say that society can be made to be more “fair”. Sure, it may well be possible to take money from the well-off and direct it to the poor and everybody benefit one way or another. But it turns out that in relatively free societies, you can only take so much tax from the well-off. After a certain point, it’s counterproductive.

But one had better not be simplistic. Some high-taxation economies do pretty well and some low-taxation economies are very nasty. Economies differ in their responses to changing tax rates. 

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