Obama’s proposal to raise taxes on those making over $1 million unleashed heated discussion over what the effect of such an increase might be. Will it reduce wealth inequality and close our deficit, or will it hurt the economy by stifling entrepreneurship and job creation? A similar debate took place earlier this year in Britain and resulted in a temporary increase in the tax rate for the top 1% of earners, from 40% to 50%. While it’s too soon for any definitive research on the impact of the change, twenty prominent British economists recently sent a letter to the Financial Times arguing that for its repeal. Does this mean Obama’s approach is misguided as well?
No, argues Deanna Julius, head of British think tank Chatham House, writing in the NY Times. Though Julius was the first signatory on the letter advocating for the repeal of the 50% rate in Britain, she supports Obama’s plan because of key differences between the US and British cases. Most importantly, the level at which Democrats have proposed taxing millionaires will likely add up to no more than 40%, a rate that’s still relatively favorable compared to other developed countries, while Britain’s 50% rate is among the highest in Europe. The US market is so large and home to so many major corporations that the risk of American billionaires fleeing to lower-tax countries is negligible compared to Britain, where the wealthy moving to Switzerland or France is a more realistic threat. Julius also points out that the highest earners in the US benefit from a host of tax-lowering exemptions and loopholes not available to the British.
Whatever the eventual outcome of Britain’s tax rate debate, we should view its lessons with an understanding that the American situation is unique – in the size of our economy, the shape of our political landscape, and a host of other factors. Looking to Europe for answers, whether such comparisons are used to argue for or against higher taxes and a bigger social welfare state, requires careful consideration of these differences.