The Equality Trust’s report, Course Correction: The Pre-Distributive Case for the 50p Top Income Tax Rate, explores the relationship between top personal income tax rates, economic growth, and economic inequality. It aims to identify whether, and how, top income tax rates are related to economic inequality, how high-income tax rates affect economic growth and the extent to which tax policy is effective in decreasing economic inequality.
Main findings:
- A cut in the top income tax rate is associated with an increase in economic inequality through a pre-tax increase in the income share of the top 1%
- A majority of voters, for all three of the UK’s main political parties, support the top 1% paying a higher proportion of their income in tax
- There is little or no relationship between tax rates and economic growth. There is only a proven relationship in the case of very high taxes of above 80%
- There may be no link between tax rates and the amount worked by high-income individuals
- Very high rates of taxation (approximately 80%) could reduce incoming migration of high-income individuals and increase outgoing migration of high-income individuals
- Higher taxation may reduce the incentive for high-income individuals to bargain for higher salaries than is warranted by the productivity they provide for their employers
- The pay of senior managers increases just as fast due to factors outside their control as to those within their control, and yet it does not fall at the same rate due to those outside factors.
Taken as a whole, the evidence provides a compelling case that a higher top rate of income tax could reduce high pay and, in doing so, deliver wider economic and social benefits.
The report recommends that the top rate of income tax should be raised to 50%, primarily for its pre-distributive effects for our economy rather than the extra revenue it may raise.