Britain is not America, of course. But the country’s recent experiment with hiking taxes on the rich may have some lessons for the U.S.
To dig itself out of recession, Britain hiked its income-tax rate to 50% for those making £150,000 or more. Proponents said the tax was needed to bring fairness to an economy, in which the rich were getting richer and not contributing enough to the cause. Critics said the tax would chase out the job creators.
As it turned out, the real impact was in tax avoidance. According to the Chancellor of the Exchequer’s budget announced today, the income-tax hike caused “massive distortions” that cost the government.
A study found that £16 billion of income was deliberately shifted into the previous tax year. As a result, the tax raised only £1 billion – a third of the amount forecast.
“No Chancellor can justify a tax rate that damages our economy and raises next to nothing,” he said.
As a result, the new budget calls for reducing the tax to 45% after April 2013. To appease the tax-the-rich crowd, the government will impose a seven percent tax on purchases of mansions for more than £2 million.
Again, this doesn’t mean that we would see the same level of avoidance in the U.S. under the Obama plan. But Britain seems to provide support for arguments by Arthur Laffer and others that when you try to tax the rich above a certain rate, they will do all they can to avoid it.