As Duncan Weldon notes on the Guardian blog:
The latest public sector borrowing figures have revealed an unexpectedly large surplus for January 2011. The Treasury repaid £3.7bn last month, surpassing expectations and representing the strongest month since July 2008 for the public finances.
But what drove the numbers? To the horror of the Tory right and proponents of trickle-down economics there is some evidence that it could be the impact of the 50p tax rate on earnings above £150,000.
The data shows that income tax receipts in January came in at £2.38bn — up by 17.8% on the year before. However receipts from national insurance contributions (NICs), which one would expect to move with income tax, rose by only 4.2% over the same period.
Last week's labour market statistics showed that there had been no improvement in the overall labour market with the percentage of people aged 16 to 64 in work being static at 70.5% between December 2009 and December 2010. The same report said that average weekly earnings had grown by only 1.1% over the past year.
So we have a mystery — the number of people in work is fairly constant, earnings have only increased by 1.1% and NICs are only up by 4.4% and yet income tax revenues are up by nearly 18%.
The most likely explanation is that higher income tax receipts partially represent the new 50p rate kicking in and rasing revenue. How else to explain the figures? Receipts are up way in advance of earnings or employment growth.
Another nail in the coffin of the Laffer curve.
And the right wing who cry and say they'll leave every time tax goes up.
The evidence is clear. They don't. They pay. As some of us have predicted.
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It’s not necessarily a repudiation of the Laffer Curve, if we’re still on the upward slope of the curve (or indeed at the peak) – the main problem with the theory is you can’t in advance assign rates to the x-axis.
erm, bit embarrassing for you this one. The big surge in revenues is actually from self-assessment, which relates to the 2009-10 tax year, before the 50p tax came in! looks much more like people bringing forward income to avoid 50p, exactly as predicted by many
Expect a rapid and robust (and highly dubious) response to this explanation, Richard, from the right/libertarians across all media outlets. And more TV/radio opportunities for you no doubt. 😉
“The big surge in revenues is actually from self-assessment”
More second-hand talking points. This assumes everyone who gets 50p rate is self-employed. Which is obviously nonsense.
Data on the exact percentage is hard to get though – Richard, any pointers?
Joanna,
Income tax receipts are up every month since April, well in advance of earnings growth, employment or NICS.
That’s 50p through PAYE.
Jan was bonus season further inflating receipts.
On the SAE point, see this:
http://www.progressivechange.org.uk/2011/02/a-bit-of-truth-on-the-50p-tax-receipts/
But also remember that most people who do a self assesment also pay tax through PAYE.
If I’m a salaried banker earning £200k a year and with a £200k bonus, I pay tax on all of that through PAYE. If I also have side investments – then I pay tax on them through SAE.
@joanna
It also relates to payments on account for this year then
And March year end corporation tax
And December bonuses at higher rate
Oh, and since the vast majority of self employed are not higher rate taxpayers I think you’re pushing your luck on your argument – not least because a great many (45% per HMRC) evade
@Duncan Weldon
I agree Duncan – you are almost certainly right
Erm,
the only people who would have paid the 50p rate in January would be those on a PAYE scheme (the others will wait until next January). Even by Labour’s estimates (which have already been slashed by the treasury), this would raise only £2.5bn/year, so probably no more than £130m/month via the PAYE people. Which isn’t the cause of a rise of several billion (especially as this is the upper-bound estimate).
Also, I don’t know if you’re a tax expert, but income tax receipts of £2.38bn for a whole month? Are you kidding me?
@Patrick Osgood
Sorry – no – HMRC stats are always late…
@Alessandre
The vast majority of people are on PAYE schemes….
And Labour may have got the estimate wrong…
It’s a possible explanation
Not the only one I am sure
But a viable possible one for at least some of it
But feel free to ignore evidence if you wish – the right always does
Richard, I think that you are making very premature judgments on these figures just as John Rentoul and Fraser Nelson have.(Although Fraser thinks it proves exactly the opposite of what you think it proves).
The reality is that we simply do not have the data to make a judgement on what the effect of the rise has been.
The figures for “Income and Capital gains tax” seem to include, corporation tax income tax and capital gains tax. That means it includes PAYE payments related to December – Self assessment payments related to 2009/2010, corporation tax payments again this will be a mixture or CT on profits from years ending spring 2010 and some payments on account.
So mixed in amongst that little lot we see the PAYE at 50%(for December)on the last Government’s projections you would expect this to raise about £200m per month. That’s around 1% of the total of £23,679 million received for “Income and Capital gains tax” in January – and you can pick that effect out?
Frankly it tells us absolutely nothing about how effective the 50% tax rate will or will not be at raising revenue.
@Richard Murphy
OK, in the best case scenario with the 50p rate, it would raise twice as much as Labour predicted (4 times what the treasury predict), and if ALL of those people are on PAYE schemes, then it would raise £600m in January.
Since the surplus is over 3 billion quid, then even by these ludicrous estimates, it’s still only responsible for 20%
@Alessandre
As I said – it’s not all – but it’s a component I suspect and I think Duncan was right to highlight it
Why celebrate the fact that hard working people, many of whom are NOT big earners, are having to tip up 50% of their income to the taxman? £45k per year is not a fortune with today’s costs of keeping a family. Just perverse. I can sometimes see where you are coming from on the major corporations but not on this. Sorry.
@Richard Murphy
The thing is, I don’t think anyone doubted that this tax rise would make money in the first year. It’s a tax rise after all, and automatically increases the tax obligations of some people.
What the right doubt is that it will make money in the long term, this will have to be seen.
At the moment however, I believe it is making about £130m/month, so something has caused this revenue rise, which is not the 50p rate. Either better-than-expected economic growth, or income rises.
Richard – the payments on account made in January are based on the previous year’s liability rather than the previous year’s income, so an increase in tax rates doesn’t effect the PoA amount.
What this is is a political commentator seizing on something which neither he nor anyone else understands the reason for, and trying to use it as an argument in support of his own views. That’s fine, we all do it, but it isn’t news. Next.
Woolley – the 50p rate comes in at 155k, not 45k.
Oh good Lord – I meant “affect”, not “effect”. That’s just shameful – I’m so sorry.
@Adam
Sorry – I am an accountant and I don’t buy that
PAYE is up on the year as a whole – this is not just a January phenomenon
And Duncan’s analysis explains that in a way no so called tax specialist here has got near to addressing
@Adam
Thanks, Adam. Yes of course. Sorry I’m thinking of Tax + NI. My mistake. Still believe excessive on “lower” middle earners.
I think that the recipts will not rise in the futre. Purley because the dull que is ever lengthening and showing no signs of slowing and with more people including the news backing an interest rate rise I fear growth will stall even more, ontop. The 50p tax rate even if it was at 100k is not unfare its only ontop of not actually half of there earnings.
It should be for just reasons and we should lower the rate for the lower earners. The 50p tax will make money but the overall re ipt will fall or stall even with the raising of tax rates.
Not convinced i’m afraid, too many “if’s, buts & maybe’s”
Lets see next year when the self-employed will also be paying the 50p rate, but i think we need a year or so to see the full effect
PAYE will obviously be up on the previous year though as wages have increased (maybe not by a lot, but they have) yet the basic Personal Allowance didn’t.
Quote: “However receipts from national insurance contributions (NICs), which one would expect to move with income tax, rose by only 4.2% over the same period.”
Why would NI move with Tax? One has a rate that drops the more you earn (NI drops to 1% for employees after approx £44k p.a) and one goes up the more you earn (Tax goes up to 40% at approx £44k p.a), so surely, the more is earned, the more tax and NI would diverge?
@BigC
Its an extra 1% not dropping to 1% from 10% so it should still go up in line with tax.
@Ryan
Think you’re wrong about the NI.
As per the HMRC Website (http://www.hmrc.gov.uk/rates/nic.htm), they indicate that the employees Primary Class 1 Rate between the primary threshold (the point at which you start paying NI) and the upper earnings limit is 11%. Then, above the upper earnings limit the rate drops to 1%
Indeed, they have a calculator to work out the NI which shows £80.74 due on £844 p/w (the weekly upper earnings limit) but only £81.30 due on £900 p/w
12% NI (11% + 1% as you suggest) on that extra £56 should produce an extra £6.72, but only produces an extra 56p (i.e only a 1% rate)
Whereas the tax would go from £11.20 (20% on £56) to £22.40 (40% on £56)
So again, surely we should expect the NI and Tax to diverge?
@BigC
Only if lots more income tax was being paid at higher rate – as Duncan suggests
@BigC
I mean you would pay the 10% then pay the 1% any earnings above that.
Which works out, It was just the way I wrote it sorry.
@Richard
Agreed, but isn’t that the point Duncan was trying to make???? That the 50% rate WAS making a difference (i.e lots paying higher rate tax). I just can’t see the correlation he then makes with the gap between Tax and NI.
@Ryan
No probs.
I would have made the point that most jobs if not practically all jobs since the recession have been part time low paid jobs, while most that fit into the top rate of both NICS and Income tax have stayed.
So NICs would not have gone up by much while the amount raised on the jump up to 50p would have made a considerable difference.
The income tax too would go up because we had positive growth for a period of time before the Coalitions policies started to take grip,so jobs picked up, we would obviously expect the receipts for NICs and income tax to go up, but the difference being that the bands changed giving a larger take in Income tax, while NICs stayed constant.
The amount it rose by is of course not just because of the increase to 50p in the £, but don’ expect the receipts to keep climbing.
@woolley
Average income is £25k. That’s the middle of the middle.
As a degree-qualified professional who’s worked for 25 years, I’ve yet to make £30k.
Would be nice if the Laffer curve’s proponents would make an attempt to produce some theoretical or empirical support for it. So far, nada. Laffer himself failed to prove that a graph of tax revenue against tax rate even contained a maxima.
On the other side of the argument, there’s the axiom: 2 + 2 = 4, a monotonic curve. The onus for proof lies entirely with Laffer’s proponents.
@Mike
Agreed!
The numbers don’t make sense here. Someone suggested earlier a the maximum the 50p tax through PAYE could raise was GBP600m in the month. This is just way too high.
If assume that for people earning over GBP150k the average salary is GBP250k (this is probably way too high)
Then the extra annual tax they would pay is 10% of GBP100k compared to last year i.e. GBP10k, or GBP800 per month.
That would imply 750,000 people earning 250,000 (and on PAYE)- just nonsense. This peak is not to do with the 50p tax. It may be due to the economy growing which on proves we should be focussing on growth not nailing the rich which seems to dominate a lot of peoples thinking at the moment.