It is an attractive illusion for those with simple minds that taxes can be raised without any effect on economic activity. In fact, raising taxes above a minimum level, which, in almost all jurisdictions, has long been exceeded, destroys wealth and, therefore, the prosperity of us all. Indeed, it is even the case that tax rises often decrease aggregate government tax receipts.
The Conservative Governments of the 1980s, for example, reduced the top rate of Income Tax from 98% to 40% and, in doing so, greatly increased its yield. In the last year of Gordon Brown’s Labour Government the top rate of Income Tax was raised from 40% to 50% with a resulting decrease in net Income Tax revenues. The partial reversal of this rise by David Cameron’s first Government, creating a top rate of 45%, led to a modest rise in Income Tax receipts.
Human nature, however, clings to its illusions and the fact that taxes cannot be raised without depressing enterprise and hard work must be learnt by each generation for itself.
Previous reductions in the rate of Corporation Tax have increased its yield yet the Chancellor, Mr Hunt, has abandoned his predecessor’s proposal to maintain our current low rate of Corporation Tax and has increased the rate from 19% to 25%, a rise in the burden of the tax of 32% ((25 – 19)/19 x 100). The Labour Party has committed itself, if it forms the next Government, to abolishing the fiscal reliefs given to those who are resident but not domiciled in this country whilst its MPs, including Richard Burgon the former Shadow Chancellor, are clamouring for a Wealth Tax to be introduced; a form of taxation which was common in Europe in the 1980s and 1990s but which is now imposed in full by only three European countries (Norway, Spain and Switzerland with three others having a partial Wealth Tax on certain classes of assets).
After the election of a Labour-Centre Coalition in September 2021, the Norwegian Government increased the rate of its Wealth Tax from 1% to 1.1%. One might think that a modest rise, until one reflects that it raised the burden of the tax by 10% ((1.1 – 1.0)/1.0 x 100) and that, real yields on Norwegian Government Bonds being currently around 2.8% and Norwegian inflation roughly 6.3%, Norwegian, like UK, Income Tax charges tax on negative real yields on wealth held in interest-bearing investments.
The Daily Telegraph reports (‘Norway counts the cost of its new wealth tax as billionaires flee …’ – Telegraph 10.04.23) that 50 of Norway’s highest earners with a combined net worth of £3 billion, including the individual who pays the largest amount of Norwegian tax, Kjell Inge Røkke, who has a net worth of £1.5 billion, have left the country since the rise in Wealth Tax. Ironically, most of these wealthy Norwegians have moved to Switzerland one of the two other European countries which, as we have seen, still impose a Wealth Tax. Providing a lesson which Sir Kier Starmer might ponder when considering the abolition of the tax reliefs for non-UK domiciliaries, however, Norway’s wealthy have been attracted by the fact that Switzerland offers substantial special tax privileges to wealthy individuals who take up residence in the country. The Swiss Government understands that there is a benefit to all Swiss citizens in attracting individuals who will bring their wealth to be spent in the country and that it is better to have a small percentage of something than a large percentage of nothing.