I’ve done what any reasonable idiot does when there’s no sleep in the morning because of heat . I’ve gone to Dan Neidle to learn about the impact of raising taxes for the higher paid.
The people who care about tax are those who pay higher rate tax and for them Dan has a brilliant article today about the Laffer Curve and Scotland’s experiment with a higher rate of tax at 48p for every £1 earned.
The Laffer Curve came from America and is a chart that shows that beyond a certain point, increasing taxes become counter-productive.
The problem with higher rate tax-payers is that they are both rich enough and eager too, to pay to find a way to avoid paying tax. Yesterday I wrote about the distress that 600,000 British folk not getting full pension tax contribution breaks are finding they have a problem. No doubt they will find a way around the problem until salary sacrifice is squashed. It would seem from Dan’s numbers that Scottish higher earners have found their ways too.
One of the Scottish solutions to raising taxes was to increase top rate taxes beyond the rates paid by higher rate tax-payers in the UK
Instead of gaining revenue for the Scottish Treasury it appears to have lost it
I am over simplifying Dan Neidle’s brilliant article and if like me you are an idiot who does reasonable things then you can read what he and his team have written here.
Neidle doesn’t work on anecdote or gut feeling, he works on data that’s available to him from official sources. Right now he knows that the first stage of the increase to 48p has not been a success
The Scot taxman is collecting less with higher taxes. He can be cautious and make his point clear enough
We will have a little more clarity in a year’s time – next year’s data will at least resolve whether this was a blip or a real trend. However, if we are to understand what the trend really means, then we will need more detailed data than the very macro numbers used in this analysis.
For example:
- Bunching analysis around £125,140 on the HMRC Survey of Personal Incomes. If people are managing income down to the threshold, there would be a “spike” around £125,140 in Scotland and not in England. It’s a standard technique, and HMRC has the data to do this easily. However, there is no public data which provides anything like the necessary granularity.
- Pension contributions and dividend income for Scottish taxpayers above £100,000 or so. On our hypothesis, both jumped in 2024-25. There is no public data on this.
- Monthly address-change data. Possibly we’ll see increased migration, although my bet is that the effect is dominated by pension contributions and dividends. If it were migration rather than income-shifting, it would be slower to appear – and it would show up here first. Again, there is no public data.
Until we get that kind of data, all we have is a hypothesis.
Scotland would not be the first to find its top rate parked on the knife-edge of the Laffer curve: when the UK itself ran a 50p additional rate from 2010 to 2013, the revenue effect turned out to be so close to zero that no one could agree even on its sign.21
We finish where we started. None of this is really about the money. £22m is a rounding error in the Scottish budget, and always was. But that is precisely the point: the 48p rate was never chiefly about raising money. It was intended to demonstrate that Scotland taxes its highest earners more heavily than England. The emerging evidence suggests that some of those earners have responded – and that the price of the gesture may be negative revenue.
No doubt the people in the London Treasury are precisely the people who get up early to read Mr Neidle.
The core weakness in your framing of Dan Neidle’s latest, Henry, is that it takes a very small and highly uncertain signal (£22m) and elevates it into evidence for a behavioural macro-story about the Laffer Curve.
That leap is doing far more work than the underlying data can support.
Start with the arithmetic.
Against Scottish income tax revenues of roughly £18bn (and please do remember that the Scottish Government of whatever party or coalition annually balances its budget, unlike Westminster, while only being able to retain a proportion of the total taxes levied and raised here), £22m is about 0.12%.
That is comfortably within normal forecast error, timing effects (forestalling, dividend shifting),
or classification noise in what is “early” HMRC outturn data.
Calling this “collecting less with higher taxes” is therefore rhetorically punchy but analytically weak.
Even Neidle’s own caution (“blip or trend”) points in the opposite direction to your conclusion, Henry.
At this scale, you are not observing a system-level response; you are observing statistical noise with a plausible behavioural hypothesis attached.
The Laffer Curve is being used here as a narrative device rather than a measured estimate. The critical issue is not whether a Laffer Curve exists (it trivially does), but where the revenue-maximising rate lies.
For high-income taxpayers in advanced economies (eg the Scandinavians), empirical estimates of the taxable income elasticity tend to imply revenue-maximising rates well above current UK or Scottish levels (often cited in the 50-70% range depending on assumptions about avoidance vs real responses).
The UK’s own 50p episode (2010–13) produced ambiguous results precisely because forestalling and timing effects dominated short-run data.
So the Scottish 48p rate (which I’m happy to pay) sitting “on the knife-edge” is an assertion, not a demonstrated fact.
The available evidence is too coarse to locate Scotland on the curve with
Dan Neidle’s hypotheses around pension contributions, dividend timing, possible migration, are plausible, but they imply very different policy interpretations.
Income shifting (pensions/dividends) is largely a timing or sheltering effect, often reversible and not necessarily leading to significant long-run revenue losses.
Migration could be more structurally significant, but typically slow-moving and empirically modest at these rate differentials.
Bunching could be useful micro-evidence, but the data is currently unavailable.
Without disaggregated data, you cannot distinguish between permanent erosion of the tax base or short-term optimisation around thresholds.
Henry, you collapse these into a single story of “taxes too high,” which is simply not justified.
My overall point about relative scale is a far more serious policy critique.
UK tax evasion and avoidance gaps are estimated (by Dan Neidle and others) in the TENS of BILLIONS annually.
Even modest improvements in HMRC’s compliance yield would have orders of magnitude far more than £22m.
From an HMT/HMRC perspective, marginal enforcement gains should dominate marginal rate tweaks at the top end, especially when behavioural responses to enforcement (reduced evasion) are less distortionary than responses to higher rates (income shifting).
So even if Scotland were slightly beyond a local revenue maximum for a narrow band of taxpayers, it would still be a second- or third-order issue compared to compliance gaps.
Dan Neidle (who was a member of the Scottish Government’s Tax Advisory Group, which was stood down) is explicit that this higher rate policy was not primarily about revenue.
You acknowledge this but then evaluate it as if it were a failed revenue-maximisation exercise.
A more coherent interpretation is that the 48p rate is a signalling device about progressivity.
The fiscal cost (if real) is negligible in aggregate terms.
The political benefit depends on voter preferences, not revenue yield.
Once you look at it that way, as I and many others who live here do, the “warning” to Burnham or Healey weakens considerably.
The relevant question is not “does this maximise revenue?” but “is the signalling worth a de minimis fiscal risk?”.
The £22m estimate is simply too small and too uncertain to support claims about Scotland being beyond the Laffer peak.
The Laffer Curve is being invoked without the empirical machinery/data needed to locate the current rate on it.
The real fiscal stakes lie in compliance and enforcement, not marginal tweaks to already (compared to other parts of Europe) moderate top rates.
What remains is a political choice about progressivity, not a proven failure of tax economics.
If anything, your blog illustrates how easily small, noisy fiscal data points can be overinterpreted when they fit a familiar economic narrative.
Unfortunately, again as is well known to those of us who live here, our Scottish media (television, radio and newspaper, all with dwindling audiences for whatever reasons) are almost overwhelmingly pro-Union and, consequently, anti-coalitions formed by the SNP and Green Party.
One other tax band manipulation technique is charitable giving through Gift Aid.
I would be interested to know whether the Scots are more generous with charitable giving and whether that can be related to tax bands.
While Scots are more likely to participate in charitable giving according to the Charities Aid Foundation and give a slightly higher percentage of overall engagement than the UK population average, HMRC does not break down total regional Gift Aid amounts by individual country/region in a way that proves one way or the other whether Scots give a higher total monetary amount through Gift Aid than the rest of the UK.
Laffer corve was an line drawn on a napkin mathematically it works at the extrema however was disastrously applied in cases such as Kansas and to a lesser extent 2010-12 Gordon Brown’s 50%
According to independent U.K. research institutions (like the Institute for Fiscal Studies), the U.K.’s broad revenue-maximising tax rate (RMT) sits around 65% to 75%.
General Tax Cuts: Cutting standard income tax, VAT, or broad corporate tax always reduces net government revenue because rates are far below RMT
Top-Bracket Taxing: Keeping total combined marginal rates (income tax + national insurance + dividend taxes) below ~50-60% prevents top-earner capital flight and tax avoidance.
Expenditure needs to be cut and productivity increased. There are no easy choices to be made.
The Scottish Governments only receive revenues from Scottish Income Tax, Land and Buildings Transaction Tax, and Scottish Landfill Tax, alongside only a partial assignment of Scottish VAT revenues, and none of the corporate taxes.
Its borrowing powers are also constrained to a token minimum.