Left Foot Forward continue to be confused on the 50p rate

February 24, 2011 2:59 PM

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.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.

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