Surprise! Higher Tax Rates Yield Lower Revenue

It almost bores me to point this out. Yet, despite decades of research and thousands of data points, a large swath of America’s political and media class still can’t seem to grasp that incentives matter. In a case of political cognitive dissonance, they continue to insist that simply raising tax rates by X will yield Y increase in revenue for the government. Conversely, they believe lower tax rates will decrease government revenue by an equal amount.

The mandarins in the UK are latest pols to run into the brick wall of incentives:

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


The self-assessment returns from January, when most income tax is paid by the better-off, have been eagerly awaited by the Treasury and government ministers as they provide the first evidence of the success, or failure, of the 50p rate. It is the first year following the introduction of the 50p rate which had been expected to boost tax revenues from self-assessment by more than £1billion.

So, for those keeping score at home; UK officials expected an extra $1.5 billion in revenue from the higher tax rate. Instead, they collected about $750 million less than the year before. That’s one heck of a miss!

So, how to explain the shortfall?

Senior sources said that the first official figures indicated that there had been “manoeuvring” by well-off Britons to avoid the new higher rate. The figures will add to pressure on the Coalition to drop the levy amid fears it is forcing entrepreneurs to relocate abroad.



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