Once again, reality has made an abject spectacle of popular statist’s fantasies about “class warfare” or “soak the rich” tax policies where tax rates are seen as having linear effects on tax revenues.
The axiom “if you tax something, you get less of it” seems to have been proven valid anew.
In Britain, 2/3 of millionaires swiftly vanished (or in just a year!) in the face of 50% tax rate increase.
From the Telegraph, (bold mine)
Almost two-thirds of the country’s million-pound earners disappeared from Britain after the introduction of the 50p top rate of tax, figures have disclosed.
In the 2009-10 tax year, more than 16,000 people declared an annual income of more than £1 million to HM Revenue and Customs.This number fell to just 6,000 after Gordon Brown introduced the new 50p top rate of income tax shortly before the last general election.The figures have been seized upon by the Conservatives to claim that increasing the highest rate of tax actually led to a loss in revenues for the Government.It is believed that rich Britons moved abroad or took steps to avoid paying the new levy by reducing their taxable incomes…Far from raising funds, it actually cost the UK £7 billion in lost tax revenue.
The above account shows that amplified elevation of tax rates equals a considerably smaller tax base and significantly lower tax revenues. Maybe politicians should learn about the Laffer curve or the elasticity of taxable income.
In terms of politics of taxation, the Philippines seems to have a parallel experience: When taxes on gold sales were substantially raised, this prompted for a surge in gold smuggling and a similar collapse in tax revenues.
The same phenomenon will likely beset the local version of the proposed sin taxes, which is being pushed by international agencies as Moody’s and the IMF.
As side note, is the Philippines in a crisis for them to keep intervening by pushing absurd policies (higher mining taxes, SMS tax etc...) and whetting on the insatiable spending appetites of local politicians for a debt financed consumption driven model of economic development?
Yet the blowback from its legislation will likely boost the informal economy and lubricate further corruption, in the same way sin taxes failed in the UK,
We should learn from the lessons from the unmasking of, or the blatant failures of political magical thinking.