Budget: Underestimating the yield on the 50p top tax rate

Budget: Underestimating the yield on the 50p top tax rate

This morning (22 March 2012) Chancellor George Osborne is mainly taking stick for his so-called 'granny tax' - as the tabloids put it. That is the tax adjustments which mean that 4.41 million pensioners lose money and the Treasury claws back some £1.2 billion.

That's a significant concern, and politically it's proving messy for the Government, who are under fire across the spectrum in the media. They've even managed to alienate the Daily Mail!

But there are many other serious issues lurking in and around this budget: massive welfare and public spending cuts (another £12+ billion of those, hardly mentioned in some analysis; the multiple hit on ordinary people from VAT, transport costs, service cuts, joblessness and stagnant pay, which outweighs the benefits for many of an increase in the tax threshold at the bottom of the income scale; the squash on low-income families and the poorest overall (much more so than Miliband's 'squeezed middle'); and of course the hand-outs and tax breaks to the very wealthiest.

Last night, in the midst of writing a short piece for the Evening Standard, I was challenged on the impact of the reduction of the 50p additional tax rate for high earners - which has, in the words of pundits, become a 'totemic issue' for fairness... of which there is little around in overall government economic policy.

The 'totem' label makes it sound as if there isn't really any substance to the case for maintaining the rate (or what one MP called "an attack on the rich" and "the politics of envy"). Indeed, Mr Osborne has suggested that the 50p levy raised a paltry sum well under £1 billion, while acting as a major business disincentive.

I was asked: "Would you like to say anything about whether cutting to 45 per cent is likely to lure back many people who have avoided paying taxes at 50 per cent?" The comment I made back was as follows: "The notion that a reduction of this scale will lead to a significant reduction in income shifting, avoidance and evasion is highly questionable and the data unclear. HMRC's report (http://www.hmrc.gov.uk/budget2012/excheq-income-tax-2042.pdf) says the measure cannot be modelled on its own, but suggests that the additional rate reduction along with the cap on higher rate relief and stamp duty changes may yield an expected average contribution to the Exchequer from those with incomes of above £150,000 of an additional £1,300 a year." Actually it goes down to £700 on some measures.

On the basis of this report, the Chancellor claimed that the top rate was raising very little money. He said, as we have noted, that it was under £1 billion on an annual basis, rather than the £2.7 billion projected in the March 2010 Budget. In a helpful and very detailed article on the ToUChstone (Trades Union Congress) blog this morning, economist Howard Reed assesses the evidence presented by HMRC. Based on the HMRC research as well as other recent evidence on the revenue impact of increases in top tax rates, he reaches two conclusions:

First, the methods used by HMRC to assess the yield from the top rate are likely to produce a significant underestimate of the revenue-raising potential of the 50p rate in the tax system as it currently stands.

Second, even if the HMRC estimate is correct, for the most part it reflects easily correctible anomalies in the tax system which allow a large proportion of high income individuals to avoid paying 50 per cent tax relatively easily. Reforming the system to close these loopholes would ensure that the 50p rate raises substantially more revenue than it does now.

The full post and argument is definitely worth reading, and can be accessed here: http://tinyurl.com/7ymo9kn

The other important document to read, of course, is tax expert Richard Murphy's (https://twitter.com/richardjmurphy) excellent 'Is 50/50 Fair?' report, which runs to 35 pages - just to warn you! - and can be downlaoded in *.PDF Adobe Acrobat format here: http://www.tuc.org.uk/tucfiles/243/50percenttax.pdf See also Richard's excellent Tax Research website and commentary: http://www.taxresearch.org.uk/blog

Howard Reed, incidentally, is the author, with Stewart Lansley, of The Red Tape Delusion. He is Director of the economic research consultancy Landman Economics, which specialises in complex econometric modelling work and policy analysis. He is also a research associate for both IPPR and Demos. Previously, Reed has worked at the Institute for Fiscal Studies, where he was responsible for the TAXBEN microsimulation model.

Reed's recent projects include a publication for campaigning thinktank Compass, In Place of Cuts which argued for a package of progressive tax increases as an alternative to large scale public spending cuts in the next parliament.

* Ekklesia's 2012 budget coverage and analysis can be found here: http://www.ekklesia.co.uk/tags/9137

* Tax Justice Network: http://www.taxjustice.net/

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(c) Simon Barrow is co-director of Ekklesia. He is primarily a theologian, but he has also studied and written about economics from the perspective of social justice.

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