The coming Great Canadian Brain Gain Article Comments NEIL REYNOLDS
Globe and Mail Update
E-mail Neil Reynolds | Read Bio | Latest Columns May 1, 2009 at 6:00 AM EDT
Margaret Thatcher, the shopkeeper's daughter, became prime minister of Great Britain – beyond all doubt, primus inter pares – on May 4, 1979, exactly 30 years ago next Monday. When she assumed office, government spending took 44 per cent of GDP; when she left more than 11 years later (November, 1990), it took only 40 per cent. In other words, Mrs. Thatcher made a notable start, against all odds, toward smaller government.
Within three years, John Major, her chosen successor, more than reversed the achievement, taking government to a 45-per-cent share. “In politics,” Mrs. Thatcher observed in her autobiography, The Downing Street Years, “there are no final victories.”
Another Thatcher achievement lasted longer – 21 years – but finally fell in April when Chancellor of the Exchequer Alistair Darling announced that the Labour government would catapult the country's highest marginal income tax rate (effective 2010) to 50 per cent from 40 per cent. Mrs. Thatcher's chancellor, Nigel Lawson, had reduced it (from 60 per cent) in 1988 and it had survived all avaricious chancellors since, Tory or Labour.
In 1980s Britain, Mr. Lawson's tax reforms were deemed so radical that the Iron Lady herself feared that her chancellor was going too far. In the end, she conceded in her memoirs, the tax cuts provided “a huge boost to incentives,” attracting large numbers of talented and mobile people to Britain. The Labour Party opposition was fierce. It was still obsessed with class warfare, still determined to tax “the rich” to the absolute limit.
In an essay that appeared last week in The Daily Telegraph, Mr. Lawson recalled the stormy passage of his tax cuts in Parliament. During delivery of his budget speech, he recalled, “the old Labour benches opposite me erupted in such loud-mouthed disorder that the sitting of the House had to be suspended: the only Budget speech by any Chancellor that has ever been interrupted in this way.”
Former Labour prime minister Tony Blair, however, recognized the merits of the lower rate and promised in his three victorious campaigns (1997, 2001 and 2005) that he would not increase the 40-per-cent rate, a promise he kept. Just as Mr. Major reversed the forward thrust of Mrs. Thatcher's reforms, though, so too has Mr. Blair's successor, Gordon Brown, reversed the forward thrust of Mr. Blair – especially in tax policy.
Mr. Lawson insists retrospectively, with Mrs. Thatcher, that his tax cuts brought in more revenue “as many of the ablest came to London from less benign tax regimes overseas.” People stopped pressing for expensive perks as a tax-free way to disguise pay raises. Use of complex forms of tax avoidance fell. Revenues from the top 5 per cent of taxpayers increased – and soon contributed a higher percentage of total income tax revenues than it ever had in British history.
Mr. Lawson now predicts that the government's income tax revenue will fall when the 50-per-cent levy goes into effect – and perhaps sooner. Britain taxes capital gains at a lower rate than it taxes income (as Canada does), but the wider gap will motivate workers to convert as much of their incomes as possible into capital investments. Mr. Lawson also predicts that the higher tax rate will “engender a renewed brain drain.”
The 50-per-cent rate is obviously punitive enough. Chris Sanger, a tax expert with Ernst & Young in London, says it will give Britain the sixth-highest tax regime of the 29 countries in the OECD. The effective tax rate, however, could be much higher. “In theory,” he wrote in a recent commentary, “people making high pension contributions could find themselves with marginal rates higher than 100 per cent at £150,000 of income.” The London-based Institute for Fiscal Studies crunched the numbers and concluded that any rate of income tax higher than 40 per cent would result in less revenue for the Exchequer.
Britain's tax increases in the midst of a severe recession are an obvious folly. America's tax increases are equally an obvious folly. Tax revenues are not falling because tax rates are too low. They are falling because there is less wealth to tax – meaning that there is less wealth at work, less wealth throwing off financial returns that can be taxed. In a March report, the Asian Development Bank calculated that the worldwide value of global financial assets (stocks, bonds, currencies) fell by more than $50-trillion (U.S.) in 2008 – equivalent to a full year of global GDP.
You can't tax what doesn't exist. When you increase tax rates on a shrinking tax base, you merely harass the wealth that remains, making it more probable that it will flee or dissipate – one way or another – further still. Wealth, after all, is highly mobile.
In these circumstances, Canada can expect to benefit substantially from the double follies of Britain and the United States. Conservative Prime Minister Stephen Harper has consistently nudged federal tax rates lower and has so far maintained this momentum through the recession. Our lower personal tax rates will attract talented people from Britain. Our lower corporate tax rates will attract successful companies from the United States. Watch for the coming Great Canadian Brain Gain.
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