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Wednesday, 7 September 2011

UK re-enters top 10 of Global Competitive Index despite 50p tax rate

>> Listen to my full report on 50p tax on this week's Pod Delusion >>

On the very day leading economists claimed the 50p top tax rate risked "doing lasting damage to the UK economy" the World Economic Forum published this year's Global Competitive Report, placing the UK once again in the top 10 of the Global Competitive Index - the best places in the world, according to the World Economic Forum, to do business.

The UK climbed two places since last year, re-entering the top 10 for the first time since 2007, despite the 50p tax rate introduced in 2009 by then-chancellor Alistair Darling.

And what of the claims in the FT by 20 leading economists that:
[The 50p tax rate] gives the UK one of the highest personal tax regimes in the industrialised world, making it less competitive internationally and making us less attractive as a destination for both foreign investment and talented workers.
According to the recently-published Global Competitive Report, the Total Tax Rate of the UK is 37.3%, the 61st-lowest in the 140 countries ranked. The United States sits at 96, with a total tax burden of 46.8%, Germany at 100 (48.2%) and France at 128, with a whopping 65.8% total tax rate.

According to the World Economic Forum, 6 of the 10 most competitive countries in the world have a higher Total Tax Rate than the UK: Sweden (54.6%), Japan (48.6%), Germany (48.2%), US (46.8%), Finland (44.6%) and Netherlands (40.5%).

Of course the open letter calling for the scrapping of the 50p tax rate specifically mentions "personal tax regimes" in the "industrialised world", and the World Economic Forum's ranking is just one measure.

In another index, the UK fares worse, at 94 in the ranking of countries according to the Extent and Effect of Taxation - a measure of whether taxation acts as an incentive or disincentive for those wishing to work or invest in the country. However 4 of the 10 most competitive countries in the world sit below the UK in this table: Japan (102), Finland (105), Sweden (113) and Denmark (130).

Noting how the 10 most competitive countries have a wide range of total tax burdens (from Singapore at 25.4% to Sweden at 54.6%) and have varying extent and effects of taxation (Singapore ranked 6 to Denmark at 130) I'm left wondering what dire economic consequences the 50p tax rate could bring.

Today's claim is only the latest in a long series where stock brokers, fund managers and banks have, over many years, argued that any tax, from “green taxes” to capital gains tax, corporation tax - and now income tax - will force an exodus and have negative, or at best no positive, impact on the economy.

Such vested interests have a strong voice, but that doesn't mean such claims are valid. We can't have economic policy held to ransom by people who disagree with the Chancellor, claiming policies they don't like will result in a mass exodus from the UK.

The only hard evidence I’ve seen in the news this morning is that high earners don’t like paying a higher proportion of tax than other people. People who earn enough money in one year to buy my house are upset.

The bottom line is that no tax regime is ideal. The window tax lead to houses being built with less windows - having a negative impact on quality of life. Every tax will have a side-effect, leading to a kind of uncertainty principle; it’s not possible to calculate the extra revenue raised by any new tax, as introducing the tax will upset the momentum of the economy in some way or other.

By arguing that it’s too dangerous to leave the tax in place, using phrases like “lasting damage to the UK economy", smacks of hysteria.

“Lasting damage” implies that today’s high earners are essential to future growth. But throughout nature we see examples where re-growth is stronger than the previous [damaged] crop.

Arguing that only today’s wealthy can drive tomorrow’s economic growth is both absurd and elitist. I can’t imagine any politician arguing against social and economic mobility, and if we have these, we can afford to lose a few of yesterday’s superstars – to be replaced by a new generation of entrepreneurs.

@JamesFirth

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