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Tax Reform Comes to Europe
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11758 |
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CURRENT ISSUES
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4 / 1987 |
2,348 Words |
| Author
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Bruce Bartlett
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Overtaxed Europe has watched with great interest the U.S. debate over tax reform. The new U.S. tax laws will bring the top rate of taxation on those with the highest incomes down to just 28 percent. Prime Minister Margaret Thatcher of Great Britain noted that the top U.S. tax rate is now lower than the lowest rate of taxation in England. "I am worried," she said, "[that] some of our scientists, our biggest wealth-creators, may say: "We can do better for our families out there."
As a result, serious efforts are now in motion to match the American example to reduce high marginal tax rates and broaden the tax base. On February 24, West German Chancellor Helmut Kohl's three-party coalition announced a plan to slice corporation tax and the top rate of individual income tax. The outcome of this European effort could have important implications for the United States. If Europe fails, an exodus of capital and a "brain drain" to the United States could follow. In fact many economists also believe that European tax reform may be essential to its economic growth, which in turn could reduce the U.S. trade deficit.
Great Britain
Britain already has experienced Reagan-style tax policies. Before Margaret Thatcher's election as prime minister, the top marginal tax rate in Britain - the tax on each additional dollar earned - went as high as 83 percent on earned income and 98 percent on investment income. These high tax rates were widely blamed for much of Britain's economic stagnation. For example, over 100,000 managers in British firms, along with many of Britain's best-known actors, musicians, and scientists, emigrated between 1974 and 1977 due to excessive taxes.
Among ordinary people, tax cheating reached epidemic proportions. By 1977, Sir William Pile, head of Britain's tax office, estimated that despite four times as many tax agents per capita as the U.S., the underground economy had risen to 7.5 percent of gross domestic product, or about 9.4 billion pounds.
Upon her election in 1979, Margaret Thatcher immediately cut both average and marginal income tax rates. The top rate fell from 83 percent to 60 percent; the bottom rate fell from 40 percent to 30 percent. Although Thatcher was criticized by some supply-siders, like Arthur Laffer, for raising the value-added tax to finance rate reductions, it was neverthless a major step forward.
Predictably, the Left strongly criticized the reduction in the top rate as a giveaway to the rich, just as Democrats attacked Reagan's 1981 program. This criticism has not been heard very much lately because current evidence from both the United States and Great Britain confirms the supply-side view that excessive marginal tax rates do little to bring in revenue and that cuts in such rates may actually increase revenue by increasing incentives.
Since 1979 Thatcher has left the tax structure largely intact, with no new initiatives. Now she is being urged to repeat the boldness of her earlier program to stimulate the British economy. Since 1980, there has been an actual decline in the number of people working in Britain. Gross Domestic Product (GDP) growth fell from 3.5 percent in 1985 to 2.25 percent in 1986; export growth also fell from 6.2 percent in 1985 to less than 1 percent. In short, the British
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