How high is too high?

Posted on December 19, 2012 by Madsen Pirie

The answer for income tax seems to be anything over 40 percent. At 40 percent people grumble but they pay it. Above 40 percent they begin to employ accountants to find creative deductions and to use tax shelters. Their companies start to relocate their head offices to friendlier places. When UK income tax was raised to 50 percent, one hedge fund relocated abroad where its personnel paid no UK taxes. The Treasury lost from that one firm all the revenue it had anticipated making from the tax increase. And others moved out as well.

London is already the world’s fifth largest French speaking city, and Francois Hollande’s new 75 percent rate for high earners could well move it further up the league table. Gerard Depardieu’s move to Belgium highlights the exodus of talent that is taking place. As I said in my “Economics is Fun” videos, an increasing share of the economy is based on talent, and talent is mobile. The lesson is to keep taxes low enough to keep people.