Labour mobility limits tax raising powers

The income tax system in the UK is highly progressive. Not many people know that, to use a catch phrase attributed, rightly or wrongly, to the great actor Michael Caine.

The top 1 per cent of earners contribute 27 per cent of all income tax receipts.  To put it in context, just 300,000 people pay nearly three times as much in total as the bottom 15 million tax payers.  Despite all the political rhetoric about tax avoidance, high earners cough up a very large amount of money to the Exchequer every year. 

Forty years ago, under the Labour government of the 1970s, the highest marginal tax rate was no less than 98 per cent.  But the top 1 per cent of earners paid only 11 per cent of all income tax.  

Jeremy Corbyn and John McDonnell, the shadow Chancellor, pledged in their manifesto to raise around another £15 billion a year in tax from this group. Corporation tax on profits would in addition allegedly raise a further £19 billion.

The realism of Labour’s costings as a whole was called into serious question at the time by people such as Paul Johnson at the Institute for Fiscal Studies. 

A paper published in the latest American Economic Review produces strong evidence that it is purely wishful thinking to imagine that anything like these amounts could be raised.  In the modern world, both skilled labour and capital are highly mobile.  There would simply be movement out of the UK altogether.

The authors, Enrico Moretti and Daniel Wilson of Berkley and the San Francisco Federal Reserve Bank, carry out a detailed statistical analysis of the impact of the different state income tax rates in the US on where highly skilled people choose to work.

Personal taxes vary enormously across the American states.  In California, for example, the average tax rate arising on top earners which is due solely to state rather than federal taxation is 8 per cent.  In contrast, in Texas and eight other states, it is zero.  Over the period of the study, 1977 to 2010, rates have also varied substantially within individual states.

Moretti and Wilson compile an impressively detailed set of data on individuals they describe as “star scientists”, defined as those scientists who are prolific in generating patents.  They examine the location decisions of some 260,000 individuals during the period they analyse. 

Their conclusion is unequivocal: “We uncover large, stable, and precisely estimated effects of personal and corporate taxes on star scientists’ migration patterns”.   Tax rates are important not just to individuals in choosing where they want to work.  The different corporate tax rates levied by individual states affect where companies such as Microsoft and General Electric locate their most productive and innovative researchers.

There are of course many factors which determine where people and firms decide to locate.  But the idea that innovative people will simply sit around en masse and wait to be fleeced is pure fantasy.  There may be little chance of the current Labour leadership understanding the real world, but the electorate needs to.