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
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.
