British Brain Drain Strikes Again

In the mid-1970s, I joined the brain drain, and left Britain for America. Two of my close university friends went too. The decision to leave home required little thought. The trade unions seemed to be running the place. Inflation was making money worthless. The top rate of income tax was 83%?and if you were dim enough to invest in British business, creating jobs and enterprise, you paid an extra 15% “unearned income” surtax, taking your tax rate to 98%.

As kids just starting out, we had no expectation of being in the top tax bracket any time soon. It was more the thought that a country that is prepared to grab 98% of people’s earnings is not a welcoming place to be. And thousands of our contemporaries thought exactly the same. The U.K. brain drain was a major exodus of youth and talent from a country that desperately needed both. A few, like me, eventually came back. But most, I believe, were lost to Britain forever.

Much more recently, we have seen another talent rush, this time among foreign nationals based in the U.K. For years, American investors and consultants in particular paid much less tax in London than in New York, with all its city, state and federal taxes. And the so-called non-doms paid no U.K. tax at all on their capital gains and earnings abroad.

In 2007, the Conservative Opposition’s finance spokesman, George Osborne, suggested that non-doms should face a new lump-sum tax. The idea was gleefully taken up and amplified by Labour Prime Minister Gordon Brown. So the non-doms started packing their bags and going back to America?16,000 of them in the first year alone. I know many among that number. One, a well-known economic commentator, echoed exactly my sentiments on leaving Britain 30 years before: “It’s not the money, though it’s a fair amount of money. It’s just that a tax of £30,000 a year doesn’t make you feel welcome.”

No, it doesn’t. And it’s bad business for Britain too. The non-dom tax raised £162 million in its first year; but according to an Adam Smith Institute report published today, the exodus of those 16,000 cost the Treasury £800 million.

Now George Osborne has reaped what he sowed with the non-dom tax, and has inherited another envy tax too, in the shape of the 50% top rate of income tax?which actually becomes 52% when you add National Insurance charges. Not surprisingly, high fliers are either leaving the country, or thinking about it. As are companies: many I know of, including one that used to pay hundreds of millions of pounds in U.K. taxes, have relocated into the more welcoming arms of low-tax Switzerland. Even the mighty HSBC seems to be actively considering moving back to Hong Kong.

As chancellor, Mr. Osborne concluded that he would have to stick with the 50% tax for at least a couple of years, because people would accuse him of favoring his City chums if he cut it. That’s politics. In terms of economics, though, it is a complete disaster. He has to act now.

Bizarrely for a nation of Thatcher’s Children, the U.K. is now one of the highest taxed countries in the world?83rd out of 86 according to a 2010 KPMG survey, with only Denmark, the Netherlands and Sweden having higher rates. That may explain why we have tumbled down the international competitiveness tables.

The number of people paying the 40% tax rate doubled under the Blair-Brown years. With loss of allowances, which phase out at higher incomes, some people now face rates of 60%. Contrast that with the United States, with its top rate of 35% on income and just 15% on long-term capital gains. No wonder the non-doms are going home.

Because of the delay between people earning money and filing their tax forms, it won’t be obvious until next year and beyond. But the 50% tax, like the non-dom tax, will actually lose revenue for the Treasury?a total of £350 billion over the coming decade, according to Adam Smith Institute analysts.

How can that be? People resent paying over half their earnings in tax. So they work less, retire earlier, seek out tax shelters or transfer assets to relatives. They might even move abroad?as actors Michael Caine and Sean Connery famously did?or simply move their earnings offshore, as three of the Rolling Stones have done. It’s a mobile world. Evidence from the U.K., Canada, France, India, Russia and many other countries confirm that high tax rates produce lower revenues.

An exodus is clearly under way in the finance sector, which in 2009 accounted for 10% of British GDP and a £40 billion trade surplus. The sector then employed a million people and contributed £66 billion in tax. A recent YouGov survey of financial managers found that 43% of them have considered leaving the U.K. Many have left already. Some 1,379 U.K. citizens moved to Switzerland in 2010, up 29% over the previous year. Around 80 of Britain’s 650 hedge funds have gone too, taking along 500 top managers?losing the Treasury £1.5 billion on their earnings alone.

The 50% and non-dom taxes are envy taxes, but envy taxes do not work. The clear evidence of the last century?whether from the policies of Coolidge, Kennedy, Reagan, Howe or Lawson?is that the rich pay more when you cut taxes. It may seem paradoxical, but if Mr. Osborne wants to balance his books, he needs to cut these taxes now, and commit to an even lower-tax future.

Mr. Butler is director of the Adam Smith Institute and author of “The Rotten State of Britain.” The Institute’s report, “The Revenue and Growth Effects of Britain’s High Personal Taxes,” is out today.