13 April 2015

It’s unlikely that Miliband and Balls will get more tax out of us Brits, however hard they try


A couple of years ago, in the Guardian (of all places), a fascinating snippet came to light: in the fifty years since 1964, however much Chancellors tinkered with the tax code – income tax rates up at 96%, down to 40%, back up to 50% – the amount of overall tax revenue that was actually brought in, as a percentage of the UK’s GDP and as shown in Chart 1, hardly changed – staying, in the Guardian’s words, “strikingly static” over the years, mostly ranging between 34% and 36%. 36% in 1964; still 36% in 2013.


As Manuel of Fawlty Towers would say: Que? Well, tax revenues are dynamic: a tax penalises economic activity, and if we increase the level of penalty, the immutable law of supply and demand cuts in – and economic activity lessens. That’s well known: as tax rates go up, not only is economic activity hit, but also tax avoidance increases. Although Art Laffer and his famous curve came in for lefty derision when he first posited it, it’s now generally accepted that there’s a tax rate that will maximise the tax take. But the numbers in Chart 1 – let us call that chart the ‘moynicurve’ to distinguish it from the Laffer curve – go beyond that: they indicate that for the UK, the Laffer curve is pretty much flat, whereby if you raise the tax rate at all, the cash amount you get from that tax is invariant, for a given level of GDP. (Of course, that also implies that whenever GDP goes up, tax receipts will go up, at a given level of tax rate – because the moynicurve says that tax receipts as a % of GDP will stay the same.)

This same phenomenon can be seen in most countries – but each country has a different flat level, as the random six countries shown in Chart 2 illustrate. Norway is able to run its tax take at a little above 55% of GDP. France has recently been flirting with trying to push up above 50%, but has only briefly got as high as 53%. The US, despite the aggressive rhetoric of Obama, doesn’t seem to be able to get its tax take above 34% of the economy.


[Note: these numbers were taken from OECD, and those from Chart 1 from HM Treasury: the two organisations use different methods of computing both tax receipts and GDP so come up with somewhat differing results. But each source agrees that the line for the relevant country is flat.]

So, each country seems to have a ‘natural’ level of tax take that is hard to shift from. Why should these moynicurves for different countries be at such different levels? Probably it’s because countries have such different cultures.

What do we know about ‘country cultures’? The most well-known analysts of the phenomenon are a father-and-son team named Hofstede (look up their Foundation’s extensive website; it’s fascinating), who identified various features – six in all – by which countries’ cultures differ from each other. Only two of these features seem to impact the level of tax take in a given country. The first feature is what the Hofstedes dub ‘masculinity’ (the degree to which a country’s culture focuses on ambition and performance – “getting stuff done”; as opposed to focusing on issues such as quality of life, service, empathy – “making sure we do stuff in a nice way”). The second feature is one that the Hofstedes label ‘uncertainty avoidance’ (a perceived need for security in life, and career stability – “don’t take risks”, as opposed to a willingness to take risks and accept uncertain situations – “just do it”).

If we combine these two Hofstede features, taking the ‘masculinity’ score, and subtracting from it the ‘uncertainty avoidance’ score, we find –in Chart 3 – an interesting relationship between the combined score and the tax take.


Of course, given the few data points involved, finding a correlation here won’t pass a stringent test of statistical validity, but it illustrates a point that most people will believe to be true – that a country’s culture will drive its behavioural reaction to changes in tax rates. The moynicurve says that reaction will alter the amount of money paid in tax to such a degree that the amount of tax money received will stay the same, no matter how extensively the government decides to tinker with rates.

Now at this point, we enter into tricky territory. Miliband’s rhetoric on non-domiciled British residents is all about what’s “fair” rather than about “what will work”: he is appealing to the electorate to think of the culture of “their” UK as being further over to the left on Chart 3, being more ‘feminine’; and more ‘risk averse’, in Hofstede parlance, than is the case – so that, contrary to what the moynicurve would imply, the populace will behave so as to hand over more tax as a percentage of GDP when the tax regime is changed. But there are three problems with that. First, wishing for cultural change and getting it are two different things. Cultures are long-term and self-reinforcing: we tell each other tales describing our successful citizens; we attract those French or other citizens whose preference is for our kind of culture; we create structures in society to reward those who follow our culture. Many in the UK would like us to become like, say, the Norwegians or the French; to be a little less ‘masculine’ in Hofstede’s parlance; to be a little less free-booting and risk-taking – if only to reduce the excesses of the City of London. But the fifty-year moynicurve says our culture is too ingrained to change overnight – indeed over-decades – and many will think that’s probably a good thing, if only because it appears that our culture is the very one that got us through the financial crisis better than other European countries – and it is moreover the same culture that drives that same key part of the UK’s tax base in the City of London.

A second problem with attempts to push our culture further to the left on Chart 3 could come from the fact that the UK’s level of tax is already an outlier on that chart: despite our being (the Hofstede numbers say) one of the most free-booting cultures of all, our ‘tax take’ as a percentage of GDP is higher than Chart 3 would suggest it should be. Is it really likely, then, that even should one choose to believe that the combined efforts of Miliband, Balls, and Sturgeon will succeed in making us Brits somewhat ‘nicer’ people, the tax take as a percentage of GDP would go up? Chart 3 implies that this might not be the case. Bear in mind also that the greater portion of the current tax take comes, probably, from the less ‘nice’ part of the populace – the ‘nicer’ crowd in the UK is not, overall, the ones from whom the new tax amounts are expected to be extracted.

Indeed, the third and final reason why such an attempt is unlikely to work is just that: the plan is to soak the rich to bring in lots of excellent new tax monies. The top 1% (overall the most mobile group of taxpayers) pay almost 30% of all UK income tax. (Many of these are non-doms, who according to the Economist are paying as much as £8.4 billion – 5.2% of all income tax in the UK. Not bad going, for such a small and despised group.) Increasing the taxes of the top 1%’s even further, through higher top tax rates; mansion taxes; elimination of non-dom status, is – apparently – a wildly popular idea among that large majority of voters who won’t be called on to pay these additional taxes. But such increases will result (if we believe the 50-year moynicurve will drive the outcome) in enough golden geese clucking off into the sunset as to ensure that the expected increase in the tax take, even as a percentage of GDP, does not transpire. And as they depart, GDP will drop – so, as Ed Balls rightly predicted, the total tax take will drop, too. There could indeed be lots of wealthy taxpayers who will docilely pay up at the new levels, but the moynicurve tells us that there will be just enough others who will balk at paying, or otherwise change their behaviour because they no longer have quite the same incentive to make money that generates tax, to ensure that the overall amount of money plucked from the citizenry remains at much the same 34 to 36% percentage of GDP – the tax take only growing or shrinking as the economy overall grows or shrinks.

This means there are two indicated courses any chancellor should take who wishes to improve the nation’s finances. First, grow GDP rather than tinker endlessly with the tax code – make it easier for companies to start up; hire; fire; grow; and trade with the world. Second, try to keep your spending at 36% of GDP, rather than the level of 45% or so that we have recently been seeing, because 36% is all you’re going to get, and the current excessive level of borrowing threatens our future.

Ed Balls proved he was thinking otherwise when he said, about the mansion tax, something to the effect of “if a 1% tax on value above £2 million doesn’t raise as much money as we calculate it will, we will just increase that tax to more than 1%”. But the moynicurve says that the UK taxpayer is too obstinate to yield up ever-greater monies to the taxman at the Chancellor’s whim. Increasing the tax rate won’t have the desired effect. And, while there isn’t much relationship between the remaining four of the six Hofstede variables and the level of a country’s tax take, the UK’s scores on those variables don’t bode well either for taking more tax from its citizens. The Hofstedes say that bods in the UK are more individualistic (less inclined to share), more self-indulgent, less long-term oriented than citizens in most other Western countries. Brit culture probably has enough unique aspects to ensure the overall tax take stays down at 36% or less of GDP – so, I suggest, let’s focus on growing GDP. And in addition, why not try to be a bit nicer to that top 1% – who have such a large role to play in making GDP growth in the UK happen.

 Jon Moynihan is Chairman of Ipex Capital, the Technology-focused Venture Capital company, and writes on issues concerning economic policy and enterprise.