As independent economist Julian Jessop points out, the percentage shares of total income for each percentile group have not really changed over the past decade. The top 1% generated 13.9% of income in 2010. Last year it was 13.1%. The top 5% was 26.4%. Now it’s 26%. This is not about income robbery by the rich. It’s about them paying a higher percentage of their total income in taxes. You may think that’s perfectly fine. They have the money: the broad-shouldered ones and so on. But it’s worth remembering that almost everyone is driven by financial incentives to some degree. Ask too much – in absolute or relative times – and you might end up with less.
Some examples. Firstly, the non-doms in the UK – or residents with non-domicile status, which exempts them from full taxation in the country. A few weeks ago The Times ran an article entitled ‘The super-rich are falling out of love with Britain’. It found that 1,400 wealthy people left the UK in 2022. Brexit has been partially blamed for the exodus. But look closely at the numbers and you’ll see that it was far more likely to be about immediate money than any vague notion that Brexit could be a long-term financial problem.
In 2015, then-Chancellor of the Exchequer George Osborne announced that permanent Non-Dom status would be abolished. Those who wanted to avoid paying full taxes would have to disappear by 2017, he said. So they left. Why pay UK taxes when you can pay almost no tax in Portugal? The exodus began in 2015—and only really took off as the late 2016 deadline neared.
If you’re wondering how much it takes for even those who aren’t super-rich to start packing, take a look at a report by the Tax Foundation in Washington DC. Their study of US population data, tax returns, and mover activity shows a very clear trend: Taxpayers are moving from high-tax states to low-tax states, that is, states with either zero or relatively low income taxes. Think Florida, Texas and Arizona. The first two have no state income tax and the latter gets laid. Between July 2021 and July 2022, Illinois, Louisiana, and New York, all high-tax states, lost almost 1% of their populations. Florida, Texas and Nevada all posted gains of over 1% (nearly 2% for Florida). The Tax Foundation says there’s no real doubt that “people have left high-tax, high-cost states to find lower-tax, lower-cost alternatives.”
There are all sorts of other examples – although none is as well documented as the non-dom cases and interstate migration patterns in the US. Search online for “working in Copenhagen, living in Malmo” or think about why very wealthy Norwegians are moving to Switzerland and you will get the picture.
The UK as a whole should be concerned about offending taxpayers – the recent exodus of UK-trained doctors is something of a warning. This group only moves partly for money – they’re mainly escaping the hell of work in the NHS – but they’re a reminder of how free the young and well-educated can be.
Perhaps the person who should take a closer look at all this is Nicola Sturgeon, First Minister of Scotland (where I live). In April, the top tax rate for Scottish taxpayers will rise from 46% to 47% (49% if you include the UK’s secondary income tax, known as National Insurance); the next higher rate will increase from 41% to 42% (44%). The corresponding figures in the rest of the UK are 40% and 45%. That doesn’t sound like much. But people seem willing to move to the state for similar amounts: In the top third of states for population growth in the US, the average combined upper marginal tax rate is about 4%; in the lower third it is about 6.6%.
Yes, people will move for a few percentage points difference. Why? Because it adds up. Consider a professional making £100,000 ($125,000) a year. In Scotland her annual income tax bill is £35,432. In the rest of the UK it would be £33,405. That’s a difference of £2,030 or 6% per year. Invest that £2,030 each year for 20 years at an assumed return of 5% and you have £75,000.
High earners can usually count. You may even have noticed that there are categories that have to pay even higher taxes: 13.4% of the population pay around 60% of the total income tax. The so-called ‘extra’ taxpayers alone – all 30,000 of them, or 0.6% of the Scottish population – cover almost 17%. They are always told that they must pay their fair share. If 0.6% paying 17% isn’t a fair share, then what exactly is? And who wants to stay to find out?
So here’s a new idea for Sturgeon. Why not be less like Louisiana and more like Florida? Instead of pushing taxpayers away, you offer them a reason to stay — and to come at all. Go a few percentage points lower than the rest of the UK top end. Then sit back and watch the high earners pour in. If you get it right, Sturgeon’s legacy could even consist of managing to fill some of the 937 vacant NHS counselor posts in Scotland.
More from the Bloomberg Opinion:
Gold gets its shine back: Merryn Somerset Webb
Scotland loses one fight, chooses another: Therese Raphael
are you rich yet That’s a ridiculous question: Allison Schrager
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Merryn Somerset Webb is a senior columnist for Bloomberg Opinion covering personal finance and investing. Previously, she was managing editor of MoneyWeek and contributing editor at the Financial Times.
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