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You Can’t Stand Still for Higher Taxes

How much tax do the rich pay? More than you think. The share of income tax paid by the top 10%, 5% and 1% of the working population have all gone up in the last 10 years (under a conservative government constantly being accused of letting the rich off scot free). In 2010 they paid 54.9%, 44.8%% and 26.5%%, respectively. Now they pay 62.3%%, 50.3% and 28.3%. This isn’t because they are earning a larger share of income overall (income inequality in the UK has not been rising). They aren’t.

As independent economist Julian Jessop points out, the percentage shares of total income for each percentile group have not really changed over the last decade. The top 1% made 13.9% of income in 2010. Last year it was 13.1%. The top 5% were on 26.4%. Now it is 26%. This is not about an income grab by the rich. It is about them paying a higher percentage of their total income in tax. You might think that is totally fine. They have the money: those with broad shoulders and so on. But it is worth remembering that almost everyone is driven to some extent by financial incentives. Ask too much — in absolute or relative times — and you might end up with less.

Some examples. First, the UK’s non-doms — or residents with non-domiciled status, which exempted them from the full force of the country’s taxation. A few weeks ago The Times ran a story  headlined “The super rich fall out of love with Britain.” It noted that 1,400 high net worth people left the UK in 2022. Brexit was partly blamed for the exodus. But look at the numbers carefully and you will see that it is much more likely to have been about money in the immediate than some vague idea that Brexit might be a long-term financial issue.

In 2015, then Chancellor of the Exchequer George Osborne announced that permanent non dom status was to be abolished. Those who wanted to avoid paying full taxes needed to be gone by 2017, he said. So they went. Why pay UK taxes when you can pay almost no tax in Portugal? The exodus started in 2015 — and really got going as the deadline approached in late 2016.

If you wonder how much it takes for even those who are not super rich to start packing their bags, take a look at a report from the Tax Foundation in Washington DC. Their study of US population data, tax returns and activity of moving companies show a very clear trend: taxpayers move from high-tax states to low-tax states, that is ones with either zero income taxes or relative low ones. Think the likes of Florida, Texas and Arizona. The first two have no state income tax and the latter is going flat. Between July 2021 and July 2022 Illinois, Louisiana and New York, all high-tax states, lost nearly 1% of their populations. Florida, Texas and Nevada all saw gains of over 1% (nearly 2% for Florida). The Tax Foundation says there is no real doubt that “people left high-tax, high-cost states for lower-tax lower cost alternatives.”

There are all sorts of other examples available — though none as well proven as the cases of the non doms and the US inter-state migration patterns. Look up “work in Copenhagen, live in Malmo” online, or perhaps think about why very rich Norwegians are decamping to Switzerland and you’ll get the picture.

The UK as a whole should worry about alienating taxpayers – the recent exodus of UK trained doctors is something of a warning. This group is moving only partly for money — they are mainly escaping the hell of working in the NHS — but they are a reminder of how footloose the young and well educated can be.

Perhaps, the person who should be looking at all this most closely is Nicola Sturgeon, the First Minister of Scotland (where I live). In April Scottish taxpayers will see the top rate of income tax move from 46% to 47% (49% once you take the UK’s secondary income tax, known as National Insurance into account); the next highest rate will grow from 41% to 42% (44%). The equivalent numbers in the rest of the UK are 40% and 45%. This doesn’t sound like much. But people appear to be prepared to move states for similar amounts: In the top third of states for population growth in the US, the average combined top marginal income tax rate is about 4%; in the bottom third, it is about 6.6%.

Yes, people will move for a difference of a couple of percentage points. Why? Because it adds up. Consider a professional on £100,000 ($125,000) a year. In Scotland their annual income tax bill will be £35,432. In the rest of the UK it would be £33,405. That’s a difference of £2,030, or 6%, a year. Invest that £2,030 every year for 20 years with an assumed return of 5% and you’ve got £75,000.

High earners can mostly do numbers. They may even have noticed that there are categories that have to pay even higher levies: 13.4% of the population pays around 60% of the income tax total. The so-called “additional” tax rate payers alone — all 30,000 of them, or 0.6% of Scotland’s population — cover nearly 17%. They are always being told they must pay their fair share. If 0.6% paying 17% isn’t a fair share, what exactly is? And who wants to stick around to find out?  

So here is a new idea for Sturgeon. Why not be less like Louisiana and more like Florida? Instead of pushing taxpayers away, offer them a reason to stay — and to come in the first place. Go a good few percentage points lower than the rest of the top end of the UK. Then sit back and watch the high earners flood in. Get it right and Sturgeon’s legacy might even be that she managed to fill some of the 937 empty NHS consultant positions in Scotland.

More From Bloomberg Opinion:

Gold Is Getting Its Glitter Back: Merryn Somerset Webb

Scotland Loses One Fight, Picks Another: Therese Raphael

Are You Rich Yet? That’s a Ridiculous Question.: Allison Schrager

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Merryn Somerset Webb is a senior columnist for Bloomberg Opinion covering personal finance and investment. Previously, she was editor-in-chief of MoneyWeek and a contributing editor at the Financial Times.

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