One of the most noteworthy elements of the 2008 Pre-Budget Report was the planned increase in income tax rates to 45% for those earning over £150,000. This measure is intended to help address the budget deficit once the economy starts to recover.
The tax increase is, however, likely to reduce the work incentives for the entrepreneurs that drive growth. Many of the brightest and best may choose to leave the UK for countries where tax rates are lower and their efforts are more generously rewarded. Britain will also be less attractive to highly-skilled immigrants.
Higher income taxes will also encourage wasteful tax avoidance strategies. Moreover, some high earners may eschew promotion and longer hours to avoid paying the top rate.
While the UK is unlikely to experience the kind of scenario described in Atlas Shrugged – where entrepreneurs decide to exit a society en masse – it is clear that the government’s tax plans will significantly hamper the production of wealth. Since it deters creativity, effort and investment, and therefore lowers economic growth, higher income tax is also likely to reduce long-term tax revenues – the opposite of its intended effect.