Taxing the rich.

For a number of years we have been fed this lie that the more we tax the rich the more income the country receives. The thought behind this is quite simple, and in essence sounds logical. It is this, if you raise the amount of tax a wealthy man pays, the more money he will contribute to the economy.

Is this true? Well to put it simply it isn't! You might be surprised to hear that. You may say, 'it makes sense that the more you tax someone the more you receive'. That sounds logical, and it is true when you look at the lower end of the social and economic scale. I pay my tax at source via PAYE (basically it is taken directly out of my wage) and there is nothing I can do to stop that. If the government decided tomorrow to increase tax for lower earners to 50 per cent, there is nothing I can do but pay it.

For the very wealthy (that is the top 1 per cent) it is different, they can invariably get away with paying a smaller proportion of their wealth simply because they can find lots of different ways around the tax system.

The government received last year £47 billion in tax from the top one per cent. Since 2000 the share contributed by this top 1 per cent has increased from 22,2 per cent to 27.7 per cent. What is interesting is since the 50 per cent tax rate has been introduced the amount the exchequer has received in income tax from the top bracket has actually decreased by £500 million.

Why is this? Well an economist called Arthur Laffer discovered this simple truth; high tax rates bring in less tax than lower ones, because they result in greater tax avoidance. There is nothing illegal about this, it just means organising your affairs within the rules so as to pay less tax. Any self employed person will do this, they will claim for anything and everything, like their; expenses, fuel, heating, clothing, telephone, etc and if you are self employed and do not earn a very high wage you could actually end up paying no tax. This is the same for very wealthy people but obviously on a grander scale.

If we look at history we will see that the evidence is there to show that what Arthuer Laffer said is true. In 1979 our top rate of income tax was 83 per cent, one of the first things the then Chancellor Geoffrey Howe did was reduce it to 60 per cent. Practically overnight the top one per cent went from contributing 11 per cent to the nations coffers to contributing 14 per cent.

In 1986 the conservatives reduced it again from 60 per cent to 40 per cent and the amount received increased to 21 per cent. So by reducing the top rate of income tax the amount paid by the most wealthy almost doubled.

Here are some other examples from around the world. In 2003 George W. Bush reduced the tax paid by those earning over a $1 million and the income from them almost double in three years.

In India taxes were cut in 1997 and income rose. In 1981 Canada's top rate taxes were cut and receipts from taxes rose. In Russia Putin replaced the complicated tax system and brought in a simple flat rate tax of 13 per cent and receipts rose by a quarter.

In the UK we have an incredibly complicated tax system, which mean that for many self employed people they have to employ an accountant to sort out their accounts. As I said in my last post Gordon Brown almost double the size of the accountant's tax guide to 14,500 pages.

Surely the answer to many of our economic problems would be to bring in a simple flat tax system. It would mean it would be easier for lower earners who are self employed to pay their tax, by having a very simple form to fill in, and secondly it would be more difficult for the rich to avoid paying tax. Those earning under £12,000 - £15,000 would not have to pay tax, thus meaning they would have more to spend, and then they can contribute towards the economy.

Many of our economic woes are down to bad management, the government has continually wasted money; one good example of this was a report which looked into waste which found that Whitehall could save £600 million on phone bills alone.

Over the years chancellors have tried to close tax loopholes, Chancellor Alistair Darling tried to do this in 2008 by introducing a £30,000 tax on 'non-doms' (these are rich people who basically work in the UK but are domiciled abroad). 16,000 simply moved their affairs overseas, resulting in a loss to the treasury.This happens all the time.

I have had conversations at work in regards to what I have written, and some have argued that we should stop this and bring in more regulation and tax them more. They say the government should bring in legislation that forces them to pay tax on what they earn in this country. But as you can see it is quite clearly not that simple, and if we tax and over regulate people and companies they will just leave. The obvious thing to do would be to reduce regulation, thus freeing up business to do what it does best, and that is grow (what businessman when asked if they wanted to stagnate or grow would say stagnate?). And secondly it is quite obvious that taxing the rich at an exorbitant rate does not work, this has been borne out by what happened to Britain in the 1970's. So surely the obvious thing to do would be to cut taxes, but I believe because that would look bad politically and also the Libdems hold so much sway and do not have a clue it is unlikely to happen, even though it should.