Peter Ainsworth is Managing Director of CAMROW and the author of Setting Universities Free, How to deliver a sustainable student funding system.
Chris Rokos paid an estimated £330 million in UK tax last year – enough to cover the basic salaries of around 10,000 newly qualified nurses. Now he is moving his tax residence to Greece. He joins Nik Storonsky, Malcolm Healey, Richard Gnodde and a lengthening list of high earners deciding that Britain is no longer worth the price.
Meanwhile Gary Stevenson, Zack Polanski, Jeremy Corbyn and the Labour left continue to claim that taxing the successful more heavily will finance ever greater public spending. It is an argument with considerable electoral appeal, and one to which the Right has yet to produce an effective answer.
Since 2019 the Welsh Senedd has had substantial powers over income tax. HMRC reduces each of the basic, higher and additional rates by 10p for Welsh taxpayers and the Senedd decides how much to add back. It can therefore cut any of the three rates by up to 10p, or raise them without limit. Yet every year it has exercised its devolved power by copying the English rates. This is awkward for Plaid Cymru, which is currently demanding still more fiscal powers while declining to use one of the most important powers it already has.
This creates an opportunity for the Conservative Party. It should adopt as policy a five-point cut in the Welsh additional rate, bringing it down to 40 per cent in line with the higher rate, and challenge Plaid Cymru to match it; or, if Plaid is of the Stevenson persuasion and really believes it serves society to tax the better off even more heavily, the Conservatives should dare it to move five points in the other direction, to 50 per cent. Economic models can always be contested. Wales offers the chance to replace argument with evidence. Let Wales test which rate produces more revenue before demanding a more elaborate version of a power it has yet to use.
There is reason to think that Wales may be near the Laffer curve’s turning point, and a tax cut could increase receipts. In 2016 Cardiff University economists James Foreman-Peck and Peng Zhou modelled the effect of reducing the Welsh additional rate to 40 per cent. Their analysis suggested that, once migration and behavioural responses were included, the cut could increase revenue by £55 million a year within a decade. Leader of the Welsh Conservatives at the time, Andrew RT Davies, was quoted as saying: “This report … nails the lie that a hike in income tax will always increase the overall tax take.”
Later, in 2020, their peer-reviewed study was more reserved, finding little net effect on revenue. Subsequent developments suggest the earlier optimism may be closer to the mark. Post-COVID remote and hybrid working means that a Cheshire executive or Bristol professional can now move across the border without changing employer. Even the more cautious result suggests that Wales could create a dramatic tax advantage at little or no long-term fiscal cost.
The calculation underlying the analysis is straightforward. On the latest HMRC figures, Wales’s 13,500 additional-rate taxpayers generate around £116 million a year from the Welsh element of tax charged in the top band. Halving the Welsh add-back from 10p to 5p therefore produces an immediate “mechanical” loss of roughly £58 million.
Then account must be taken of likely changes in behaviour. An additional-rate taxpayer living in England but close to Wales now has a solid reason for improving their lifestyle by moving to Wales’s greener pastures. Should they so do, at average additional-rate incomes, each such mover would generate about £16,800 a year in Welsh income tax, so roughly 3,450 relocations would offset the £58 million mechanical loss, and any more would generate a net gain.
Some 13.7 million people live in England but within 50 miles of Wales, a catchment including Liverpool, Manchester and Birmingham as well as Bristol, Cheshire and Shropshire. Even if only a small fraction are additional-rate taxpayers for whom relocation is realistic, the pool is many times larger than the roughly 3,500 movers needed for the additional rate tax cut to pay off.
Scotland has already conducted the experiment in the opposite direction. Its highest income-tax rate is now 48 per cent. Tax Policy Associates estimated this summer that the rate will cost the Scottish Government around £22 million a year. The Scottish Government disputes the conclusion, which illustrates the problem with economic models: inconvenient estimates are always contestable. The visible effects of a substantial Welsh tax cut or sharp increase would be harder to explain away.
This is where the political challenge bites and gives the UK Conservative Party an opportunity to intervene in the arguments about devolution and taxation at the same time. Plaid Cymru cannot say that it lacks the power: the Senedd can already vary the Welsh additional rate. Every week that departures such as Rokos’s go unanswered, the Overton window moves further towards Stevenson and Polanski. Badenoch should challenge Plaid Cymru to choose: 40 or 50 per cent? Whichever way it goes, Britain gets evidence.
If Plaid still refuses to use the power it already has, why should it be granted still more? If the evidence points towards lower rates, the next task is larger than winning an argument: making Britain as a whole attractive enough to tempt its wealth creators home.
Peter Ainsworth is Managing Director of CAMROW and the author of Setting Universities Free, How to deliver a sustainable student funding system.
Chris Rokos paid an estimated £330 million in UK tax last year – enough to cover the basic salaries of around 10,000 newly qualified nurses. Now he is moving his tax residence to Greece. He joins Nik Storonsky, Malcolm Healey, Richard Gnodde and a lengthening list of high earners deciding that Britain is no longer worth the price.
Meanwhile Gary Stevenson, Zack Polanski, Jeremy Corbyn and the Labour left continue to claim that taxing the successful more heavily will finance ever greater public spending. It is an argument with considerable electoral appeal, and one to which the Right has yet to produce an effective answer.
Since 2019 the Welsh Senedd has had substantial powers over income tax. HMRC reduces each of the basic, higher and additional rates by 10p for Welsh taxpayers and the Senedd decides how much to add back. It can therefore cut any of the three rates by up to 10p, or raise them without limit. Yet every year it has exercised its devolved power by copying the English rates. This is awkward for Plaid Cymru, which is currently demanding still more fiscal powers while declining to use one of the most important powers it already has.
This creates an opportunity for the Conservative Party. It should adopt as policy a five-point cut in the Welsh additional rate, bringing it down to 40 per cent in line with the higher rate, and challenge Plaid Cymru to match it; or, if Plaid is of the Stevenson persuasion and really believes it serves society to tax the better off even more heavily, the Conservatives should dare it to move five points in the other direction, to 50 per cent. Economic models can always be contested. Wales offers the chance to replace argument with evidence. Let Wales test which rate produces more revenue before demanding a more elaborate version of a power it has yet to use.
There is reason to think that Wales may be near the Laffer curve’s turning point, and a tax cut could increase receipts. In 2016 Cardiff University economists James Foreman-Peck and Peng Zhou modelled the effect of reducing the Welsh additional rate to 40 per cent. Their analysis suggested that, once migration and behavioural responses were included, the cut could increase revenue by £55 million a year within a decade. Leader of the Welsh Conservatives at the time, Andrew RT Davies, was quoted as saying: “This report … nails the lie that a hike in income tax will always increase the overall tax take.”
Later, in 2020, their peer-reviewed study was more reserved, finding little net effect on revenue. Subsequent developments suggest the earlier optimism may be closer to the mark. Post-COVID remote and hybrid working means that a Cheshire executive or Bristol professional can now move across the border without changing employer. Even the more cautious result suggests that Wales could create a dramatic tax advantage at little or no long-term fiscal cost.
The calculation underlying the analysis is straightforward. On the latest HMRC figures, Wales’s 13,500 additional-rate taxpayers generate around £116 million a year from the Welsh element of tax charged in the top band. Halving the Welsh add-back from 10p to 5p therefore produces an immediate “mechanical” loss of roughly £58 million.
Then account must be taken of likely changes in behaviour. An additional-rate taxpayer living in England but close to Wales now has a solid reason for improving their lifestyle by moving to Wales’s greener pastures. Should they so do, at average additional-rate incomes, each such mover would generate about £16,800 a year in Welsh income tax, so roughly 3,450 relocations would offset the £58 million mechanical loss, and any more would generate a net gain.
Some 13.7 million people live in England but within 50 miles of Wales, a catchment including Liverpool, Manchester and Birmingham as well as Bristol, Cheshire and Shropshire. Even if only a small fraction are additional-rate taxpayers for whom relocation is realistic, the pool is many times larger than the roughly 3,500 movers needed for the additional rate tax cut to pay off.
Scotland has already conducted the experiment in the opposite direction. Its highest income-tax rate is now 48 per cent. Tax Policy Associates estimated this summer that the rate will cost the Scottish Government around £22 million a year. The Scottish Government disputes the conclusion, which illustrates the problem with economic models: inconvenient estimates are always contestable. The visible effects of a substantial Welsh tax cut or sharp increase would be harder to explain away.
This is where the political challenge bites and gives the UK Conservative Party an opportunity to intervene in the arguments about devolution and taxation at the same time. Plaid Cymru cannot say that it lacks the power: the Senedd can already vary the Welsh additional rate. Every week that departures such as Rokos’s go unanswered, the Overton window moves further towards Stevenson and Polanski. Badenoch should challenge Plaid Cymru to choose: 40 or 50 per cent? Whichever way it goes, Britain gets evidence.
If Plaid still refuses to use the power it already has, why should it be granted still more? If the evidence points towards lower rates, the next task is larger than winning an argument: making Britain as a whole attractive enough to tempt its wealth creators home.