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Taxing Times
July/August 2009

On the intrepid assumption that any forecast from the government will prove reliable, public expenditure in the 2010/11 financial year will be 48.1 per cent of GDP. When Labour came to power in 1997/8 the comparable figure was 38.2 per cent. So the state's share of the economy has risen by about one-tenth of national output under Labour. But the gang of politicians allegedly "managing our economy" has found it easier to spend than to tax. Whereas tax was just under 35 per cent of GDP in 1997/8, it is expected to be 34 per cent of GDP in 2010/11. 

Why has it been so difficult to raise taxes? Part of the explanation is the impact of the recession on the wealthy. High income-earners, company profits and capital gains make a disproportionately large contribution to tax revenues and the downturn has hit them particularly hard. But that has not stopped Gordon Brown and Alistair Darling from trying to extract even more money from them. Under Treasury's plans, the increase in the top rate of income tax to 50 per cent from April 2010 is expected to increase tax revenues by £1.1 billion in 2010/11 and £1.8 billion in 2011/12. 

Several experts on tax systems have asked whether, ultimately, the increase in the top tax rate will generate any additional revenue. The point is that taxpayers adjust their behaviour in response to increases in taxes. Over time, these adjustments reduce or eliminate any rise in tax receipts. Most obviously, rich people can move themselves, and the profitable companies employing them, elsewhere. Several hedge fund managers have stated that, because of the 2009 Budget and the 50 per cent tax rate, they will leave the UK and set up in more tax-friendly nations. But even before the 2009 Budget, some companies had announced they were relocating from London to lower-tax jurisdictions, such as Ireland and Bermuda. 

The low-tax nations are small or even tiny, in terms of population and total national output, compared with high-tax nations, such as Germany, France, Italy and the UK. By contrast, tax havens are minuscule, while low-company-tax states have populations beneath that of the average European state. 

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