The folly of static tax analysis

22 02 2012

In a desperate attempt to replenish its empty coffers, (and, I’m sure, in the interest of “fairness”), the UK government boosted the nation’s top marginal income tax rate to 50 percent. The result? Well, let’s just say it’s not exactly a surprise to anyone familiar with the adverse effects of tax policy. From The Telegraph:

The Treasury received £10.35 billion in income tax payments from those paying by self-assessment last month, a drop of £509 million compared with January 2011. Most other taxes produced higher revenues over the same period.

The article continues:

Although the official statistics do not disclose how much money was paid at the 50p rate of tax, the figures indicate that it is falling short of the money the levy was expected to raise.

A Treasury source said the relatively poor revenues from self-assessment returns was partly down to highly-paid individuals arranging their affairs to avoid paying the 50p rate.

Static analysis, meet a dynamic economy.

A free market is only free if individuals are able to move their rightfully earned money about as they see fit – and that includes reconfiguring income to minimize tax exposure. The Warren Buffetts of the world might cry foul (even as their armies of accountants shelter their own assets), but if tax proponents actually expect to collect the amount promised by their unrealistic assumptions, they’re going to have to send the IRS to every citizen’s door with baseball bats. At least when the mafia shakes people down, they aren’t pretending to be legitimate.

The UK’s recent experience gives us some indication of what might happen if Obama receives the suite of higher taxes he included in his 2013 budget proposal – like the dividend tax increase. That beauty would boost the tax on dividends from today’s 15 percent to a shocking 44.8 percent. Should that pass, is anyone willing to bet that investors are going to stand around waiting to get walloped?

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