ths" (The Sunday Times December 13, 2009).
Those caught in the highest tax band are not only escaping to UK tax havens, but leaving the country altogether. However, the issue of those exiting the country is not only a financial loss but also an exodus of skill and knowledge that has led to it being labelled a 'brain drain'.
"Ten years of Labour has re-created the brain drain. High taxes and Government interference are driving people away" (Damian Green, the shadow immigration minister). The term brain drain was coined in the 1950s following the mass emigration of scientists and other experts to America. Tens of thousands of people also left the country to escape the industrial unrest and high taxes of the 1970s (The Telegraph February 21 2008).
A 'Laffer Curve' is the name given to a graph plotting total tax revenues against the actual rate of taxation. The economic theory behind the curve is that if nothing is taxed, there will be no revenue for the government; and if tax rates were set at 100% there would be no revenue, as there would be no incentive to work.
The curve above shows the simple Laffer curve with both rates of 0% and 100% generating nil revenue. Essentially, the equilibrium point or the point on the graph that provides the most revenue is not set at 50% or any other number. There is no way to be certain of at which point or rate of tax that revenue is maximised, although it is possible to estimate this parameter known as 'taxable income elasticity' based on previous behaviours and reactions to changes in tax rates.
The Institute for Fiscal studies (IFS) is an independent economic research body focusing on taxation and public policy. The IFS's primary focus is into the research of public finance and spending with an aim to create a transparent analysis of the government's procedures. During their research and analysis of Alastair Darling's budget and pre-budget report, the IFS contradicted the budget, claiming that in their opinion the new tax rate would not increase revenue. The graph below shows The IFS's estimate in red, along with the Treasury's estimate in yellow.
(Institute of Fiscal studies, Mike Brewer and James Browne, http://www.ifs.org.uk)
The Laffer curve above also shows in blue the rising revenue that the change in tax rate would generate, if there was no change in elasticity. The graph clearly shows the different opinions of the Treasury and the IFS. Whereas the IFS have predicted a 50% tax rate would significantly decrease revenue, the government have an opinion that is in complete contrast to this, expecting revenue to rise by almost ￡1billion. The IFS curve suggests that the peak yielding tax rate is about 42.5%, where as the government suggest the peak is beyond even the 50% mark.
The process of policies regarding taxation is based largely economic theory, and the estimates in the above graph. The IFS are very quick to point out the unpredictability of the actual response to changes in rates, but are convinced their own estimates are as accurate as possible. According to the IFS, the government may have implemented a change that will actually reduce revenue at a time when they are under great financial pressure to increase it.
In order to analyse government policies, it is necessary to understand how the decision to implement these policies are made, and explore the processes behind policy making. With taxation and budgeting being such a pivotal part of any government, it i
