Feb 2011 24

Left Foot Forward have posted a reply from Duncan Weldon to Fraser Nelson and I poking holes in his argument that strong income tax receipts in January show the 50p rate has effectively raised revenue.  He makes two arguments.  First, he says that there is a longer term pattern of tax receipts rising faster than earnings and employment since the 50p rate was introduced:

“income tax receipts have increased in advance of earnings or employment growth each month since April 2010 (when the 50p rate was introduced)”

That in no way shows that the 50p rate is raising money, in fact it is perfectly compatible with the scheme being desperately ineffective.  Let’s take a hypothetical example to show why: a simple economy where the only high earners are two hedge fund managers making a million pounds a year.  The 50p rate is introduced and one of them relocates to Switzerland, the other stays in London.  Tax receipts will be lower because the hedge fund manager has left, but so will employment (down one) and earnings (down one million).  But taxes will rise relative to employment and earnings, as the hedge fund manager who stays is paying a higher rate on his income.

In our case employment and earnings are still going up, we’re recovering from a recession after all.  But the public finance figures released earlier this week can’t tell us whether or not revenue is higher or lower than it would have been without the 50p rate.  People have left the UK to avoid 50p tax (reducing employment and earnings), others will take different steps to reduce their taxable income, and it will take proper study to ascertain whether or not enough of them left to offset those who remain paying 10 per cent more on their earnings above £150,000.  Duncan Weldon has literally nothing to add to the debate over whether or not that is happening.

Even if his metric were relevant, which it really isn’t, a jump in revenue in January wouldn’t be particularly telling because a significant amount of that would be self-employment returns for 2009-10.  He retorts that we don’t understand self-assessment because there are payments on account for 2010-11 due in January 2011.  There are, but – as the HMRC reports in the page he links from his blog, and anyone who has filled out a self-assessment return knows – there are also balancing payments for 2009-10 due in January 2011.  And in an economic recovery those balancing payments are likely to be a significant amount.

The best estimates we have right now of the 50p rate’s effects are studies from the Institute for Fiscal Studies, the CEBR and one the TPA produced by modifying the Treasury’s calculations to a more realistic Taxable Income Elasticity assumption (reported in this book).  All those estimates suggested that the measure could well lose money.  That would mean ordinary families would, as well as putting up with the economic pain, have to pay more, or see greater cuts in spending, in order to pay for higher tax rates on the rich.

Matthew was the Chief Executive of the TaxPayers' Alliance, author of Let Them Eat Carbon and editor of How to Cut Public Spending (and still win an election)



  • Caveman

    Correct English is ‘to Joe Bloggs and me’, not ‘to Joe Bloggs and I’.

  • Mathew

    But you are just ignoring the facts.

    All evidence points to the 50p Tax rate increasing tax reveneue. If it was losing money how did it make through 9 months of a Conservative Led Government?

    • Orac54

      Yes, but WHAT EVIDENCE? What facts? Just that the Conservatives haven’t abolished it isn’t evidence.

  • Felix

    TPA hypothesis is simplistic and frankly risible. Infamous in the eyes of all top economists for its dodgy figures and suspect modelling, it even laughably refers to its own discredited work as evidence for its own arguments.

    • Fleeing taxpayer

      Who are “all top economists” who say the TPA hypothesis is”risible”. Please name them.

      Don’t tell me Duncan weldon is one. He was a graduate trainee at the b of e and a failed junior fund manager. He knows even less about tax than investing. Still, at least he’ll never have to worry about the 50% tax rate.

  • Darryl Ashing

    Actually the payments on account are based on the previous year’s tax bill so the rise in tax receipts has NOTHING to do with the 50% rate, unless there was as urge in PAYE payments in January which seems a touch unlikely.

  • Mucky Mary

    So the bankers held a gun to our heads and demanded we all empty our wallets in order to keep them in business and now that we’re asking for some of our money back they’re threatening to leave.

    Good riddance. Let the Swiss pay for the next massive bailout of these chinless wonders.

    The City and London in general has held sway over the UK economy and British politics for far too long anyway.

  • Mucky Mary

    So the bankers held a gun to our heads and demanded we all empty our wallets in order to keep them in business and now that we’re asking for some of our money back they’re threatening to leave.

    Good riddance. Let the Swiss pay for the next massive bailout of these chinless wonders.

    The City and London in general has held sway over the UK economy and British politics for far too long anyway.

  • Steve

    The one aspect of this issue that cannot be measured (the best one can do is state that it does exist) is the opportunity cost. I am a British national, living and working in Hong Kong. I left the UK on a overseas placement 2 and a half years ago. I was due to return to the UK in six months time, however I have decided to extent my stay for at least another 2 and a half years. The primary reason for this was the high rates of tax in the UK, of which the 50p rate is but the latest extreme example. Many of my friends and colleagues have similar views and have, where posssible, made similar decisions. This lost opportunity cost exists and could be very large, however it cannot reasonably be measured.

    The difficulty I have with the argumens of Left Foot Forward is that it is impossible to hold all other variables constant when trying to understand relationships in complex data, thus I am forced to believe that such definitive conclusions will only reflect the observer’s bias.

    However, we do know that the laffer curve exists, and for me and many of my colleagues and friends it has gone well past its inflection point in the UK.