Cut taxes, get money

It’s true: when you cut top tax rates, the rich pay more. UK Chancellor of the Exchequer George Osborne reports that his 2012 cut in the 50p-in-the-pound rate for top earners – to 45p – brought in an extra £8bn of revenue from those earning more than £150,000. It’s a prime example of the Laffer Curve (named after the economist Arthur Laffer): if you tax people beyond endurance, they will – one way or another – thwart you and pay less tax. And we have seen it all before, many times. In 1979 Chancellor Geoffrey Howe cut the UK's top rate of income tax from 83% (!) to 60%, Before the cut, the top 1% of taxpayers paid only 11% of the total take. By 1988 they were paying 14% of the total take. His successor Nigel Lawson cut top rates even more, from 60% to 40%, and receipts rose further. By 1997, the top 1% of earners paid a huge 21% of the total tax take.

Over in America, President Calvin Coolidge slashed top taxes too. As a result, revenues nearly doubled, and the share paid by $100,000+ earners rose from 28% in 1921 to 51% in 1925. Of course, top rates climbed again, but in the 1960s, President Kennedy slashed the highest rate from 91% (!) to 70%. As a result, the share paid by $50,000+ earners rose from 12% in 1963 to 15% in 1966, and total tax revenue grew from $69bn in 1964 to $96bn in 1968. Then in 1981, President Reagan introduced the largest tax cut in US history, cutting all taxes, and slashing top rates from 70% to 50%. In 1981, the top 1% of earners paid 18% of the tax take, but by 1988 they were paying 28%. President George H W Bush raised top taxes to help close the deficit: his move had exactly the opposite effect. But when George W Bush cut taxes, the economy powered ahead, and the tax take from million-dollar earners doubled from $132bn to $273bn in just two years.

It is a pity that, in 2012, George Osborne did not cut the top rate of tax from 50% to 40% – or even less – as we at the Adam Smith Institute advised him to do. He was still not confident enough to take on fully the ‘tax the rich’ arguments so deeply rooted in the psychology of envy. But the rich these days do not get rich from inheritance any more – check the Sunday Times Rich List to see that – they get it from building businesses that create jobs, customer value, and prosperity. A bolder cut would have raised even more revenue that enabled him to cut the deficit, and stimulated economic growth at the same time. Let’s hope he follows the evidence in his forthcoming Budget.