A 40p top rate of tax is on its way on 16 March

Posted on March 3 2016

According to the Daily Mail this morning:

George Osborne should slash tax for top earners further still, say senior Tories after figures showed a cut from 50p to 45p raised an additional £8 billion.

The Chancellor said income tax data for 2013/14 "completely" defied predictions made by Labour that cutting the rate would cost £3 billion and give top earners an average £10,000 tax cut.

This argument makes no sense at all. It is true that latest estimates (not data) suggest that those with the highest incomes will have paid more than £8 billion more in 2013/14 when compared to 2012/13 but let's be clear why. They were told that if they delayed their income from March 2013 until sometime in April 2013 the tax rate would fall by 5%, and so they did just that. And as a result income was understated in 2012/13 and overstated in 20913/14. Official estimates show there is no expectation that this pattern should recur and of course there is not. This is a not a phenomena of the tax rate; it is a phenomena of the change in rate.

If in doubt, note that when the rate was introduced £16 to £18 billion of income was shifted, producing the almost exact opposite effect. And the rate was never in existence for long enough for its impact to be properly appraised.

But the  the question has to be asked as to why Osborne has drawn attention to this now, and why the Mail has picked up on it. Remember there is a budget coming, and as The Times wrote recently (in its Red Box email)

One of the untold stories of 2016 has been the very gradual, almost unnoticed decline of George Osborne.

It is in this personal concept and within the political constraints that Brexit poses that George Osborne has to decide what to do with taxation in his 2016 budget. Almost as an aside, the demands of the OECD and IMF that he now stimulate the economy rather than pursue a policy of austerity adds a little piquancy to the whole issue.

It does not help that Osborne goes into the budget facing the expectation that he will propose major changes in the relief on personal pension contributions, if not on those on company funds (as yet). These changes, that would broadly speaking reduce or eliminate tax reliefs when pension contributions are made, but with the resulting future income stream being entirely tax free in similar fashion to an ISA happen to be deeply popular in Tory homelands where local parties are dominated by the relatively prosperous self employed who have long enjoyed the tax relief opportunities that pensions provide as a means of mitigating what they see as the overly burdensome contribution to a state for which they have little regard.

So will that reform be what he draws out if the bag this time round as the big budget reform?  I doubt it, very much. This decision, like those on Short money and a third runway for London will be deferred: without a certain majority and with Osborne's political capital at very low ebb the case for deferral is overwhelming.

What then will Osborne do to re-grab the political initiative and re-inflate brand Osborne? My suggestion is something very simple: look out for tax cuts. Osborne has form in doing the three things. The first is the unexpected. The second is what the opposition wants. The third is sometimes (not always) the politically astute move. A tax cut cut meets all these criteria since he could even argue that this is the stimulus the economy needs.

Now, admittedly, the Opposition would not be calling for a cut in the higher rates of tax. But that's precisely the point: Osborne has a habit of doing things that let him say he is doing what they want - delivering a stimulus in this case - whilst doing something that suits his purpose. And in this case his purpose would be to cynically keep the Tory heartland happy and so boost the Remain vote, to boost his own status by confirming him as a tax cutting Chancellor for the well off, and to bait the opposition.

Nothing Osborne does is unplanned. If he's talking about tax cuts working two weeks before a budget there is a reason. A 40p tax rate is on its way.

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29 Responses

  1. Alberto says:
    March 3 2016 at 8:51 am

    Thanks for explaining how the £8billion was achieved. Obviously, I smelt a rat but I hadn’t tried to find it. I wonder how obvious this is from the year on year results. I’ll have to do some research.

  2. Richard says:
    March 3 2016 at 9:36 am

    Would this really be that much of a stimulus? How much of the 5% tax cut will those earning over £150,000 actually spend. Will they not just save more? And of course, there will be the inevitable delay in tax receipts as the represented get their recurring planning opportunity.

  3. Simon says:
    March 3 2016 at 10:20 am

    ‘A 40p tax rate is on its way.’ Well we can sit back and wait for all the investment and job creation as the rising tide lifts all boats and wealth trickles down – not to mention another bout of income forestalling that should be great for the 0.001%

  4. Andrew says:
    March 3 2016 at 11:02 am

    Re 2013-14, there is some new data here: https://www.gov.uk/government/statistics/personal-incomes-statistics-tables-31-to-311-for-the-tax-year-2013-to-2014

    See table 3.4, page 38-39. Admittedly based on a statistical sample, but using real data for 2013-14, not just a projection 2012-13.

    Presumably a “pensions ISA” would involve no tax relief on the way in; tax free roll-up; tax free on the way out? Are there any other countries with a similar system?

  5. Pilgrim Slight Return says:
    March 3 2016 at 11:09 am

    It seems to me……………

    Do doubt the actual drop in Government income from a 40p rate of tax will be ‘compensated’ by cuts in the public sector?

    So really, in actual fact he is providing a stimulus at one end whilst taking away stimulus on the other.

    So one may well negate the other leaving us with no net economic gains or at least very little shout about.

    However, as you point out – British voters love being bribed.

  6. Ivan Horrocks says:
    March 3 2016 at 12:41 pm

    I’m not a betting man, but if a were I’d put a tenner on you being right about this, Richard.

    I did have one quibble with your additional comment, though. Isn’t ‘Osborne’ and ‘truth’ an oxymoron?

    • Richard Murphy says:
      March 3 2016 at 1:36 pm

      I’m not a betting man either

      I floated the idea with commentators on the panel at the British Chamberof Commerce conference that I was speaking at

      They did not agree

      Which increases my confidence

      As for the last comment, what can I say?

  7. Keith P says:
    March 3 2016 at 5:49 pm

    It’s interesting that the Whole of Government Account is accrual based whilst HMRC figures are cash based, not sure how WoGA debtors reconcile to HMRC tax due calculations.

    Also, under austerity rules, the only people in receipt of large pay increases are those being taxed at the 50P rate so would not disproportionate pay increases generate a greater tax take?

  8. Katy says:
    March 3 2016 at 5:55 pm

    Richard do you mean popular or unpopular?

    “These changes, that would broadly speaking reduce or eliminate tax reliefs when pension contributions are made, but with the resulting future income stream being entirely tax free in similar fashion to an ISA happen to be deeply popular in Tory homelands where local parties are dominated by the relatively prosperous self employed who have long enjoyed the tax relief opportunities that pensions provide as a means of mitigating what they see as the overly burdensome contribution to a state for which they have little regard. “

  9. Theremustbeanotherway says:
    March 3 2016 at 8:08 pm

    Of course a cut in the VAT rate would be out of the question!

    What more would you expect from the economically illiterate Mr Nasty!!

  10. Connard Park says:
    March 3 2016 at 9:11 pm

    Osborne seems hell-bent on changing the image of the UK as a decent place. A cut in the income tax could lure the sort of wealthy foreigners to the UK that have been protesting that their home regime treats them too harshly. You only have to look at the sort of people who went to South America from Central Europe in 1945 to see that incentives attract the wrong sort.

  11. Syzygysue says:
    March 3 2016 at 9:29 pm

    In case you missed the link… unless I’m much mistaken, Yanis Varoufakis is advocating People’s QE in this article

    http://europe.newsweek.com/brexit-george-osborne-jeremy-corbyn-yanis-varoufakis-432637?utm_source=email&utm_medium=email&utm_campaign=rss

  12. Keith Fletcher says:
    March 4 2016 at 3:51 pm

    At the same time as reducing the taxes on the wealthy this government is literally contributing to (and probably in many cases actually being the cause of) the deaths of some of the most vulnerable people in our society. If they had any shame, they should be feeling it in spades, but they don’t.

    This example of the death in poverty of an ex-soldier who in later life developed type 1 diabetes is just another shocking example. My own son found out a few months ago that he is no longer entitled to the Disability Living Allowance that all type 1 diabetics were previously entitled to because the Tories have changed the rules under the new PIP scheme to exclude a whole range of previous categories of entitlements. When you take away the means to live – you should be held accountable for the inevitable deaths that will result.

    Why oh why can some people still not see what these heartless ******ds are doing to our country? It is getting to the point that I would like to see some of these so called politicians given some of their own medicine and locked away to rot in complete deprivation of the means of sustaining life.

    http://www.independent.co.uk/news/uk/benefits-sanction-resulted-in-my-brother-david-clapson-s-death-says-gill-thompson-as-she-pleads-for-a6911386.html