Why the 50p tax-cut is based on Osborne’s own dodgy dossier


2:39 pm - March 22nd 2012

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contribution by Steve Akehurst

Yesterday, the Government released the long-awaited HMRC report on the impact of the 50p tax. The report argues that the tax only raised around £1 billion a year – lower than the Treasury’s initial forecasts of £2.6 billion a year.

This has seeped into received media wisdom, confirming the prejudices of much of the right leaning press. It was used to justify cutting the rate to 45p.

But the evidence in support of what the Chancellor argued is not there.

1. The report rests on analysis of one year’s Self Assessment returns – that of 2010/2011. It points out that, as the last Government didn’t bring in the 50p tax until a year after it was announced (2009), in 2009 the super-rich essentially paid themselves their salary for 2010/2011 in the tax year of 2009/2010 instead, to avoid paying the new 50p tax.

HMRC estimate that between £16-18 billion in total was brought forward in this way, and say this corresponds to a yield of about £1 billion for the 50p tax after other ‘behavioural effects’. Thus, there is a huge drop displayed in revenue for 2010/2011 and an inflated amount for 2009/2010. This is the main empirical basis for the claim that the wealthy ‘just avoid the 50p tax’ and that it brings in very little.

But the problem with this, as many (including Faisal Islam) have pointed out, is that by its very nature forestalling can only happen once. The data for 2010/2011 is thus hugely distorted, and cannot be a reliable basis for such a judgement on the 50p tax.

2. The report goes on to estimate how much the tax would have brought in independent of ‘forestalling’ and other one-off behaviours. Again, they come up with about £1 billion. But again, this is highly questionable. It’s based on high levels of other avoidance. The initial Treasury estimates already factored such avoidance in to its initial 2010 estimates.

What the HMRC have done is extrapolated on the basis of an even higher Tax Income Elasticity (TIE) – the extent to which the wealthy try and avoid tax – than contained within the initial Treasury figures. It has deliberately picked a higher rate (0.45 rather than 0.35), and the ‘post behavioural yield’ of the 50p tax is less for this reason.

As Paul Waugh has pointed out, this was a highly political decision. Language within the report suggests it was done at the behest of the Government.

Howard Reed is among many to have cast doubt on this study, and argues that past Treasury figures have actually overestimated such avoidance (TIE) rather than underestimated it as the Government now implies.

The claims that rich bankers simply moved abroad after the introduction of the report has also been debunked. This, of course, is notwithstanding whether any Government should ever just accept defeat over such behaviour rather than cracking down on it!

* * * * *

The upshot is, relative to the scale of the judgement it’s making, the HMRC report on the 50p tax is scarcely worth the paper it’s written on.

It was hobbled from the start by George Osborne, who limited it’s only empirical analysis to one highly distorted, unrepresentative year of Self Assessment returns.

This is important because calculations within the report form the basis for which the OBR scores the reduction to 45p as only costing £100 million – in reality, it is likely to be far higher, perhaps even £3 billion.

All of this is why even the OBR’s boss Robert Chote has told Channel 4: “This is a judgement based on not even a full year’s data…The costing of these sorts of changes is by no means unarguable…”

It was up to the opponents of the 50p tax to produce credible, empirical evidence showing it didn’t work. Yesterday’s report failed this test spectacularly.


Steve Akehurst blogs from here

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Reader comments


1. ex-Labour voter

Yes, getting paid in a different tax year can only happen once.

It was interesting to see those MPs cheering the budget. Apparently, it was largely the Liberal Democrats. I thought, what does this remind me of?

I know, when all those dumb ass Labour MPs cheered the 2007 budget which cut 2% off the standard rate paid for by the abolition of the 10p rate.

It was a ‘brilliant’ idea by Brown (supported by Balls). But it soon came to bite them on the arse. Let’s do everything we can to ensure that history repeats itself.

2. orangebooker

Given Labour claimed it was going to be a temporary tax I’d argue its up to supporters of making it permanent to produce credible empirical evidence that it brought in money. Ultimately we’ll never know. For the record I support cutting the 50p rate but think govt should have waited till the economy had properly picked up again

That is why they had to get rid of it before it could bed down and bring in some real revenue.

When it was announced the wealthy pushed through a lot of income before if came in. And will now delay income and bonuses until it has been repealed next year. The people who earn (and I use the word earn in the literal sense. Most of them are not worth the money) don’t have PAYE on a monthly basis.

Ask yourself this. If it did not bring in much money why did the rich whine like they did? And why is the Champagne flowing in the city now?

Once again the Lie Dems get played like the chumps they are. Quite a week for Lib Dems. First they vote to destroy the health service, and now to cut taxes for the rich.

4. gastro george

You can also be sure that the reverse will happen now. Some salary this year will be delayed until after the rate drop. Idiots will then be able to “show” how this year the tax revenue is lower, and the following year how the lower rate leads to more tax revenue.

George – spot on, I think it’s exactly what they’ll do. There will now be a huge ‘reverse forestalling’ which will inflate the intake from 2013-2014. Osborne will then compare that year to 2010-2011, is my guess, and claim it raises more at a lower rate. On such ropey grounds are dangerous economic consensuses built!

Orange Booker – the initial Treasury estimates had it bringing in substantial income, and there are signs from other tax receipts that they may have been boosted by the 50p rate. Also, the bankers bonus tax – which is far easier to avoid, in fact – brought in far more than the Treasury estimated, and that was at the lower TIE of 0.35! It is not good enough to say ‘we don’t know’ – we could know if the Chancellor commissioned a proper review of it, not this sham. What is he afraid of?

That’s why the Tories were determind to rush the cut in this year. It would have been much harder to spin the lie that it doesn’t bring in enough money at the end of the 2011/12 tax period.

“The claims that rich bankers simply moved abroad after the introduction of the report has also been debunked. This, of course, is notwithstanding whether any Government should ever just accept defeat over such behaviour rather than cracking down on it!”

How do you crack down on people moving abroad? Are proposing building a big wall?

8. orangebooker

Steve – bankers’ bonus tax was one off unless I’m mistaken? Similar logic applies to 50p, i.e. in the short term it provides boost because seen as temporary, however if it becomes permanent risk is people will find ways of avoiding or evading it, possibly by moving abroad, albeit it would unlikely be the sole consideration. Then you face low or possibly even lower receipts as such behavior applies to whole income, not just that over £150,000. Finally, even if it does raise some income, there is the risk lower rate would have raised even more.

2. orangebooker

” Given Labour claimed it was going to be a temporary tax I’d argue its up to supporters of making it permanent to produce credible empirical evidence that it brought in money. ”

Income tax was supposed to be a temporary tax. The buggers said it was a temporary measure to defeat Napoleon. Clearly the voracious political class have a different interpretation of the word temporary than the sane class.

” A year after Waterloo, income tax was repealed ‘with a thundering peal of applause’ and Parliament decided that all documents connected with it should be collected, cut into pieces and pulped. ”

Jeez, it would take them a long time to pulp the modern version of the tax code.

” The critics of income tax had won the day, but experience had proved that it was a practical means of raising revenue, ”

Yep, give them an inch and they will take a mile when they discover a new way to spend our money.

http://www.hmrc.gov.uk/history/taxhis1.htm

I think this was inevitable (given the government) and maybe not entirely unfair-but I wish the Lib Dems had pushed harder.

I realise it’s important, and I won’t deny it’s necessary right now, but I have a basic problem with very high taxes on high earners: it needs to be very clearly justified why taxing people extra-high rates simply for earning a lot isn’t just a case of group A voting to take money away from group B to spend on themselves. ‘They’re the rich’ isn’t enough of a justification.

If the Lib Dems had managed to swap it for a good solid tax on private education (which really is socially divisive because it distorts meritocracy) or a tax on mansions (an asset you can’t move offshore) I wouldn’t have minded so much. They’ve failed to do that and will pay for it.

@ RichardW:

The old theory was that the government should support itself in times of peace by its huge nationalised holdings of land. This was actually unpopular because it created a risk that the government would use its powers to distort laws and taxes in favour of its own holdings-doing things like creating effective government monopolies. Weirdly, letting people trade freely and taxing them may be fairer. Would you prefer it if the government nationalised the utility companies and BT and sold you water, power and internet access at fixed prices as a revenue earner instead of making you pay tax?

@ RichardW

“Income tax was supposed to be a temporary tax. The buggers said it was a temporary measure to defeat Napoleon.”

In the good old days the government was supposed to fund itself in peacetime through its own nationalised holdings. This created problems when the government designed the rules to maximise its income from what it was selling. If we had no income tax but the government earned its income from selling you power, water, food and internet access at fixed prices would you prefer that?

Collecting location rents, mineral fees, monopoly rents, spectrum rents etc would be sufficient, Mender. Some of the sin taxes could stay because of the costs that users impose on the rest of us. Location rents are a much better source of revenue than creating distortions by taxing income. Something recognised by all sensible economists from Adam Smith onwards who favour taxes that are unavoidable and do not create distortions. Income taxes are the bastard child of the political class with the resulting predictable mess.

Osbourne should have just said that cutting the fifty pence rate was part of his strategy to take ‘the poor’ out of tax altogether, thus the measure would have avoided any scrutiny from the Left and the fucking incompetent morons at the Labour Party.

We know that using the words, ‘taking the poor out of tax’ is enough to blind the squeamish Left from examining the motives and the outcomes of any policy.

Christ, had Blair spun the Iraq invasion and the subsequent slaughter of countless civilians as ‘taking the poor out of tax’ he would have been hailed as a hero.


Reactions: Twitter, blogs
  1. dsugg

    RT>> @ligomersall: Why the 50p tax-cut is based on Osborne’s own dodgy dossier | Liberal Conspiracy http://t.co/gbY9nIBa via @libcon

  2. glencoehiker

    RT>> @ligomersall: Why the 50p tax-cut is based on Osborne’s own dodgy dossier | Liberal Conspiracy http://t.co/gbY9nIBa via @libcon

  3. David Emeke Ogbue

    RT>> @ligomersall: Why the 50p tax-cut is based on Osborne’s own dodgy dossier | Liberal Conspiracy http://t.co/gbY9nIBa via @libcon

  4. ElaineSco

    Liberal Conspiracy – Why the 50p tax-cut is based on Osborne’s own dodgy dossier http://t.co/wi6pFSyt

  5. Daniel Sladen

    Very fair points/interesting if u are into tax @libcon: Why the 50p tax-cut is based on Osborne's own dodgy dossier http://t.co/VYJoOgkd”

  6. Jayne Hill

    Here's my post on @libcon on why you shouldn't believe claims that the 50p tax raised 'little or no money' http://t.co/1rDhZdaO #budget

  7. representingthemambo

    Why the 50p tax-cut is based on Osborne’s own dodgy dossier | Liberal Conspiracy http://t.co/bKQUkSma via @libcon

  8. Alex Braithwaite

    Why the 50p tax-cut is based on Osborne’s own dodgy dossier | Liberal Conspiracy http://t.co/CafpIUQR via @libcon

  9. Robert CP

    Good jargon-free summary > 'Why the 50p tax-cut is based on Osborne's own dodgy dossier' http://t.co/NHUOrJ1a by @steveakehurst

  10. Cllr Graham Walker

    The 50p tax rate only raised £100m. http://t.co/MkBo8gdi

  11. David Gillon

    "Why the 50p tax-cut is based on Osborne’s own dodgy dossier" http://t.co/pp9PDFm5

  12. paul and lynn hewitt

    "Why the 50p tax-cut is based on Osborne’s own dodgy dossier" http://t.co/pp9PDFm5

  13. Lilacwheelz

    "Why the 50p tax-cut is based on Osborne’s own dodgy dossier" http://t.co/pp9PDFm5

  14. TheCreativeCrip

    "Why the 50p tax-cut is based on Osborne’s own dodgy dossier" http://t.co/pp9PDFm5

  15. Stephe Meloy

    Why the 50p tax-cut is based on Osborne’s own dodgy dossier | Liberal Conspiracy http://t.co/XhACm91u via @libcon #ConDemTyranny

  16. Daniel Pitt

    Why the 50p tax-cut is based on Osborne's own dodgy dossier http://t.co/p2qJsA3U #Tories #Osbornomics #austerity #economy #poverty

  17. Why the 50p tax-cut is based on Osborne's own dodgy dossier … - taxcut

    […] original post here: Why the 50p tax-cut is based on Osborne's own dodgy dossier … This entry is filed under Uncategorized and tagged archives, budget, champagne, city, collecting, […]

  18. Steve Akehurst

    @jameskirkup The HMRC report was very questionable at least – a total fix at worst. http://t.co/1rDdrD1E





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