Back in 2010, I excoriated the new Prime Minister of the United Kingdom, noting that David Cameron was increasing tax rates and expanding the burden of government spending (including an increase in the capital gains tax!).
I also criticized Cameron for leaving in place the 50 percent income tax rate imposed by his feckless predecessor, and was not surprised when experts began to warn that this class-warfare tax hike might actually result in less revenue because the reduction in taxable income could be more significant than the increase in the tax rate.
In other words, bad policy might lead to a turbo-charged version of the Laffer Curve.
Allow me to elaborate. In most cases, punitive tax hikes do raise revenue, but not as much as politicians predict. As explained in this three-part video series, this is because it takes a very significant reduction in taxable income to offset the revenue-generating impact of the higher tax rate.
But if a tax increase imposes a lot of damage and taxpayers have enough flexibility in their financial affairs, then it’s possible that a tax hike can lose revenue (or, as we saw with Reagan’s “tax cuts for the rich,” a well-designed reduction in tax rates can actually generate higher revenue).
With that background knowledge, let’s now take a closer look at David Cameron’s tax increases. They’ve been in place for a while, so we can look at some real-world data. Allister Heath of City AM has the details.