What is a brain drain?
A brain drain occurs when professionals and high-earners leave their country of origin for a better life elsewhere. Emigration is a big step, so the circumstances often have to be extreme to warrant it.
In 1966, the UK elected Harold Wilson, a socialist Labour leader, as prime minister with a landslide victory. Wilson immediately reversed the trend to lower tax rates and hiked them back up to an eye-popping 90% for the country’s top earners.
The Beatles were the highest-earning pop band of the day, and the increase in the tax - rate had a profound effect.
The UK’s currency was then pounds shillings and pence, with 20 shillings to the pound. Under the new Labour regime, the highest tax on earned income was 90%.
George Harrison, the band's bass guitarist, was alarmed that for every pound he earned, the Government would take 19 shillings (£19 and 6p, to be precise). He was also concerned that the money would be used by the Government to fund the manufacture of weapons. George wrote the first protest song, ‘Taxman’ (with some help from John Lennon).
Harrison discovered that the band’s tax obligations meant all four members were nearly bankrupt. The lyrics clarify their concerns, writing as the taxman the words are: ‘There is one for you and nineteen for me.’
Anthony Travers, our podcast professional this week, emigrated from the UK to live in Cayman, where the tax rate on earned income was and still is 0%. Furthermore, his gross income was as much as 26 times what he earned in one of the best law firms in the City, Clifford Turner, which later became Clifford Chance.
The concept of income tax can be traced back to the late 18th century.
In 1799, William Pitt the Younger introduced the first income tax in the UK during the Napoleonic Wars to finance the war effort. The tax was initially temporary but later became permanent.
The initial income tax rates were relatively modest. In 1799, taxpayers with an income over £200 per year were required to pay a tax of 10%.
In 1842 the Victorian era, Sir Robert Peel introduced a new income tax structure based on three principles: universality, graduation and equality. The reforms reduced tax rates for lower-income individuals with their rates for those who earned more.
With World War I came the need for the Government to increase revenue. Income tax rates increased to their highest marginal rate of 30% by 1918.
The same happened with World War II. A temporary spike in income tax rates saw the highest marginal tax rate for the country's wealthiest tax residents rocket up to 99.25% in 1949
By the 1970s, when the Beatles wrote Taxman, tax rates were coming down, but Harold Wilson reversed this trend. However, this was a time when Exchange Controls were in force. Taking your money out of the UK was impossible - once in the UK your money stayed in the UK and was taxed.
In 1979, Margaret Thatcher lifted Exchange Controls. She had no choice. She merely opened the stable door; the horse had already bolted. With the introduction of the Euro Bond, money could move freely across borders. Margaret Thatcher regulated this situation by opening the sluice gates for everyone to enjoy the free movement of money. It was a new era and the birth of the offshore financial centre.
During the 1980s, Margaret Thatcher reformed tax to encourage the growth of British enterprise and boost the economy. With the free movement of money, she wanted money to come to the UK rather than leave it. She lowered the top rate of tax to 60%.
But Margaret could not prevent money from seeking safe places with zero tax rates. Cayman was one such country. Anthony Travers was not coming back to the UK. He was in a great position to shape the country's legislation to attract foreign funds and make his fortune.
Whizzing to now, the UK is not reeling from an expensive war but from a pandemic and the shutdown of businesses during lockdown. However, the effect on our finances is as extreme as if we were borrowing following a war such as the Napoleonic Wars and World Wars I and II. The coffers are empty, and the Government needs to find ingenious ways to raise taxes without causing a brain drain.
The Tories have already raised taxes until the pips squeak. What can a new Government do? As readers will have gathered, my money is on raising taxes from tax cheats and lowering taxes on businesses and inward investment. But I am not a politician, and Governments never cease to amaze me with some of the daft tax decisions they make—I am sure the next Government will be no exception.
Time will tell!