When the 50% income tax rate was introduced in April 2010 we know that its introduction was accompanied by massive tax abuse, with income being shifted from the 2010-11 tax year into 2009-10. HMRC estimate around £18 billion was moved between years to save tax.
As is reported this morning, as the end of the 50% tax era approaches companies are thinking hard about delaying income payments to achieve the same tax saving result for their employees.
Now I'm not saying for one moment that any leopards have changed their spots: they haven't, I'm sure. What I am suggesting is that tax campaigning has changed the tax environment in the meantime, for the better. And in the process all the absurd calculations on Laffer effects offered by HM Treasury in 2012 need to be revisited: it is very obvious that these embraced an implicit assumption that the behaviour would not be noted. When that assumption is changed then so does so the so called Laffer effect.
Some of us have, of course, said this for a long time. Now it's time for those setting policy to notice.
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Richard, I am puzzled by this. HMT forecast the effect of reverse forestalling of the 45p tax rate in their March 2012 Economic Forecast. See p. 111:
http://cdn.budgetresponsibility.independent.gov.uk/March-2012-EFO.pdf
HMT think the Laffer peak lies somewhere between 45p and 50p:
“….45 and 50 per cent are
very close and either side of the implied revenue-maximising additional rate.”
Their previous estimates of the Laffer peak were higher, which explains why they were surprised by the extent of the forestalling of the 50p rate.
Why do you think reverse forestalling indicates a change in behaviour? Surely it indicates NO change. Just as high earners avoided tax by forestalling in 2009-10, so they are now planning to avoid tax by reverse forestalling in 2012-13 and 2013-14.
But the whole thing is a political dodge aimed at improving the figures in time for the election, anyway – just look when the income peak from the 45p rate will be. If you’re interested, I wrote about this a while ago:
http://coppolacomment.blogspot.co.uk/2012/03/forestalling-tax-avoidance-and-politics.html
Or do you mean that because of tax campaigning, high earners will reduce their planned forestalling? If so, then yes you are right – HMT’s estimates of loss of income due to forestalling will be too high and the Laffer peak will have moved to the right. Maybe it’s just my brain (writing with a cold!) but it’s not entirely clear from your post.
I agree with you and what you conclude as to what I’m saying…
Get well!
It needs tro be remembered that at the time the rate was reduced from 50% to 45% it was pretty clear that the so-called evidence for the impact of the increase to 50% was actually no such thing as the relevant tax returns had not yet been prepared and submitted. What the Tories will actaully achieve with the help of Goldman Sachs is the manufacture of evidence in order to support what was just an ideological move – tax revenues will increase in 2013/14, so they can then argue that a reduction in the higher tax rate leads to an increase in revenues (you heard it here first!)
To put it more succinctly – most of us believe in evidence based policy, the Govt believe in policy based evidence!