Let’s remember the historical facts here. Low tax rates aren’t associated with faster growth – if anything the opposite. For example, in 1988 Nigella’s dad cut the top income tax rate from 60% to 40%. Since then, GDP per head has grown by an average of 1.4 per cent per year. That compares to growth in the 29 years before the cut of 2.6% - and that was a time which included top tax rates on earned income of over 70%. Much the same is true in the US; the economy there was stronger in the 50s and 60s when the top tax rate was 91% than it has been recently with lower taxes.
You can read this fact in three ways.
One possibility is that growth has slowed in the 00s for other reasons, and the slowdown would have been even worse, had taxes not been cut. For me, this runs into two problems: one is that some of the likely causes of slow growth, such as the banking crisis, might not be independent of top tax rates. Another is that supporters of lower taxes believe that other reforms in the 80s should have raised trend growth too – such as privatization, deregulation and the weakening of trades unions. If they did so, their effect was swamped by other things.
A second possibility is that lower top taxes actually cause lower growth. For example, they might incentivize financialization and hence greater financial fragility, or encourage rent-seeking such as jockeying for top jobs or CEOs extracting higher pay for themselves. Of course, higher taxes might cause some top-earners to retire or emigrate. But this doesn’t necessarily cause a big loss of output. If, say, Eden Hazard were to move to Spain in response to higher taxes here, Chelsea won’t field only ten players.
To argue that higher top taxes are the “economics of the madhouse” requires a strong case for my third possibility and good arguments against the second and third. This, I think, would be very difficult.
All this is a story about economic growth. You could argue, however, that higher top taxes would reduce tax revenues even if they don't much affect GDP: as Alan Manning has said, tax-dodging is more sensitive to tax rates than labour supply.
Even here, though, the argument is moot. For one thing, as the IFS has pointed out, these are subject to huge uncertainty. And for another, in this context the fact that Labour’s so-called “tax grab” would impinge upon the “middle classes” such as doctors and headteachers isn’t a bug but a feature. Insofar as it does so, it’s a revenue raiser. Teachers and doctors are probably less internationally mobile than the mega-rich, and less able to use tax-dodging ruses. For the purposes of raising revenue, they are a large slow-moving target.
For me, the non-hysterical arguments against Labour’s tax plans lie elsewhere. You could argue that – with tax morale low partly as a result of the rise of individualism – they’ll decrease social solidarity. People will regard them not as the price for living in a civilized society but as a burden which subsidizes “scroungers”. Or you could argue that the revenue raised by taxes will fuel wasteful public spending. Or you might argue that redistributive taxation isn’t enough: we need to reduce inequalities of power as well as income. Or you might argue that the tax base should be shifted from incomes to land and inheritances*. And personally, I’m not wholly unsympathetic to the view that very high taxes diminish freedom – though few people can consistently argue for this, given the general lack of support for liberty.
What you shouldn’t do, though, is argue that higher top taxes will wreck the economy. Other things might do that, but it’s unlikely that top taxes will.