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Don't cry for me, Lord Lloyd Webber
The government’s raising tax rates
And taking more pounds
From super-rich folk.
Just leave the country
Before you go broke.
No, Andrew Lloyd Webber didn’t rewrite the lyrics to one of his most famous songs but the Daily Mail did publish the composer’s rant about the proposed hike in England’s top personal tax rate from 45 to 50 percent. He would never leave Britain, the baron wrote, but other talented—and rich—people would, leaving the country mired in recession. It’s not just the 50 percent tax rate, frets Lord Webber, but the additional 14.8 percent paid by the self-employed, leaving a top rate higher than that in any other developed country. Factor in the huge differential between that rate and the 18% top rate on capital gains and government will drive people to become speculators instead of truly productive workers.
Lloyd Webber has company. Actor Michael Caine talks of moving to America and a British soccer coach warns that his sport will collapse as the best players go elsewhere.
The concerns are real but overstated. Sure, some people will adjust what they do to avoid high taxes, and a few will decamp for places that tax less. Some will hire lawyers and accountants to turn earnings into gains to cut their tax bills. But will a 5-percentage-point rise in the top rate lead to massive behavioral change?
Research here in the U.S. says no. The econometrics are tricky, and teasing out responses to changing tax rates in a big and complex economy confounds easy analysis. But the bottom line is consistent across many studies: Rich people have temporary changes in income when their taxes are altered but they don’t last long. Instead, they respond to higher taxes by shifting income across time or re-characterizing income into forms that face less tax, such as capital gains. Long-run behavioral changes (moving abroad, reducing labor supply, etc.), however, are relatively small.
The top U.S. tax rate has bounced around a lot over the past few decades, dropping from 50 to 28 percent, climbing back to 39.6 percent, and then falling again to 35. Incomes followed different paths after each change, sometimes rising sharply after rate cuts and other times rising after rate hikes. Similarly, incomes have fallen after both rate cuts and rate increases. Despite assertions to the contrary, there’s been no clear pattern.
Things may work differently in other countries. My TPC colleagues Eric Toder and Rosanne Altshuler tell me that some countries face a greater risk that high tax rates will chase citizens away. And big differences in tax rates on different kinds of income will change behavior.
But President Obama’s plan to return our top rate to the 2000 level doesn’t worry me. Sure, I’d rather see lower rates and a broader base if we could meet distributional targets, but slightly higher top rates aren’t terrible. England’s proposed tax hike is less clear-cut. Even so, while Lord Webber may be miserable, I’m not crying for him.
Posts and Comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.