"Britain's recent experiment with hiking taxes on the rich may have some lessons for the U.S.
To dig itself out of recession, Britain hiked its income-tax rate to 50% for those making more than £150,000 ($240,000). Proponents said the tax was needed to bring fairness to an economy, in which the rich were getting richer and not contributing enough to the cause. Critics said the tax would chase out the job creators.
As it turned out, the real impact was in tax avoidance
. According to the Chancellor of the Exchequer’s budget announced today
, the income-tax hike caused “massive distortions
” that cost the government. A study found that £16 billion of income was deliberately shifted into the previous tax year. As a result, the tax raised only £1 billion – a third of the £3 billion amount forecast
MP: There are several basic economic lessons here including:
a) If you tax something, you get less of it, b) taxes and regulations are always distortionary because people can change their behavior to avoid them, i.e. raising tax rates raises tax avoidance, c) incentives matter (as do disincentives), and d) the Laffer Curve accurately predicts the inverse relationship between tax rates and tax revenues at high marginal tax rates.
Thanks to Peter Parlapiano for the tip.