Hitting the Middle Classes by Taxing the Rich

The Paradox of Taxation

The latest tax figures from Britain make interesting reading. Her Majesty’s Revenue and Customs reported a 60% fall in the number of taxpayers declaring an income of over £1 million a year during the 2010-2011 tax year as compared to the previous year. Ten thousand individuals simply left the UK or found ways to sidestep Gordon Brown new 50% income-tax rate.

The net effect was that the contribution to the UK’s government coffers from millionaires fell by almost 50% (they contributed less than 5% of the total versus 9% in the previous year). Far from increasing the tax burden on the wealthy, the new rate has effectively increased pressure on the UK’s middle classes.

“The net effect was that the contribution to the UK’s government coffers from millionaires fell by almost 50%”

As some Western Governments –  including the US –  try to address their deficits by hitting their wealthiest 1%, maybe politicians should remember that this course of action may simply increase the burden on low and middle income earners. Governments need to find the correct balance: when the top 1% feel that they are being unfairly burdened, they are mobile, professionally advised and thus in a position to dramatically reduce their tax liabilities. David Cameron’s Government has tried to find the balance by dropping the rate to 45% and time will tell if this is good enough. We have yet to see the results of the new French Government’s dramatic 75% rate but if Britain’s example is anything to go by the results could well be disastrous. It would appear that in the case of taxing the top 1% less may well be more.