Disincentivising high incomes

A 50% tax rate was introduced to the UK in April 2010, to apply to all earnings over £150,000.  This high tax rate was devised to raise additional income for the treasury by increasing the payments made by the highest earners, therefore increasing the Robin Hood effect of income tax.

However, it is likely that this higher tax rate is unlikely to increase tax receipts to the degree that the government would like.  In the 1970s, the UK implemented an 83% income tax rate on income over £20,000 (which equates to around £190,000 in today’s money).  This tax rate was scrapped within five years, as it was found that penalising high earners to this extend caused inefficient incentives in the economy; anyone who was running a successful business was better off relocating out of the UK, and therefore taking any employment of multiplier effects out of the country.

The same is likely to be true of the current 50% rate, though to a lesser extent.  The fact remains, however, that those impacted by the 50% rate are those who are most able to do something about it, such as relocating away from the UK, and this may even lead to reduced tax income for the government.

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