I've already noted that in 2011/12 H M Revenue & Customs forecasts it will collect £6.7 billion from the 50p tax rate.
As their data shows, they forecast people in this bracket will pay £47 billion in tax. I have extrapolated that over £6.7 billion of that will be at the 50p rate. All this is in my new TUC report.
It's important to note therefore that HMRC are not so optimistic for 2010/11. There they forecast almost ten percent fewer people will pay tax at 50% - some 30,000 fewer in all, and the tax paid by them will be more than £5 billion less overall. The 50p rate yield will also, very obviously, be lower as a result.
Why's that? Candidly, it's not clear from their data, all of which is forecast. But it seems at least possible they think people may have avoided the onset of the tax rate by bringing income forward into 2009/10. If that's the case the 2010/11 data would be the wrong basis for making any decision on the effectiveness of this tax.
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In one of your previous posts on this subject you mention that approximately 60% of the payers of this tax cannot avoid tax because of PAYE, so surely the HMRC are barking up the wrong tree when they suggest that data has been skewed because of tax payers bringing forward income?
Bonuses
It was a question the OBR should never have asked: single variable too difficult to atomise over the short time-frame. That they are prepared to ask it says more than their ‘conclusion’.
Dear Richard
Your £6.7 billion figure assumes absolutely no behavioural change and ignores the fact that taking more of people’s incomes in tax has secondary effects on other tax receipts.
Any economist would know that a tax change has income AND substitution effect which would mean this straight line extrapolation is just daft. And yes, people will seek to avoid paying it. We supply-siders readily admit that human nature means this is inevitable, and so this is a matter of heart vs. head. All evidence since the 1980s shows that lower top rate marginal tax rates have led to higher revenues.
In this follow up blog you are covering yourself for the inevitable result that analysis of 2010-11 will show straight-line extrapolations like this to be wrong. Far better to make policy on what actually happens than what you think should happen in a world where we are all tax zombies whose behaviour doesn’t change to changed rates.
Best
Ryan
This is no straight line extrapolation. For heaven’s sake Ryan – this is yet another occasion when you show how limited your maths is.
All I’ve done is take out of the HMRC data what THEY say the 50% tax rate will collect
And sure as heck they say they allow for forecast changes in behaviour in their work
You really do have to improve your maths
But more than that – as the report shows – I accept HMRC may have over-estimated – but if by much then the case for massive reform on tax avoidance is overwhelming because to avoid these bills the scale of avoidance would be unprecedented
So candidly you’re really not going to win on this one – and so far your analysis is so trite it’s shocking
Richard,
Your figures are right – as I acknowledged, but so is my maths.
The HMRC figures show the liabilites of the 50p tax rate, now – today.
You have calculated how much more this collects than 40p.
But we know through economic theory that the taxable income elasticity is significant for rich people. So lowering the rate to 40p increases the taxable income significantly, as people work more, more people move to the UK, fewer people engage in tax avoidance. Whether it increases it to the extent that it overcompensates for the decline in the rate itself depends where we are on the Laffer Curve.
The proof will be in the outturn data.
No we do not know that from economic theory
Some assert that
But there is no evidence to support their case – the Laffer hypothesis does not have evidential support at these rates of tax
In that case you are simply delivering rhetoric
I have delivered analysis
And the chance you’re right is as close to zero based on evidence as could be expected
For an example of what I mean:
You’re example would suggest that if the 50p rate was lowered by 1p to 49p, the tax liability would fall by £678.9 m.
In reality, the HMRC ready reckoner suggest lowering the 50p rate by 1p would cost……………..just £70m. Look: http://www.hmrc.gov.uk/stats/tax_expenditures/table1-6.pdf
Behavioural effects.
Take that up with them, not me
As I have said, I have revealed what HMRC are estimating
I’m baffled as to what your argument with that is
@Ryan Bourne, “In reality, the HMRC ready reckoner suggest lowering the 50p rate by 1p would cost……………..just £70m.” That is no doubt because the Treasury consider that for every £1 collected as tax, there is a deadweight loss to GDP of 30p. It is therefore puzzling that they do no push for land value taxation, which imposes no deadweight loss at all.
I think that’s pushing your luck way beyond only limit of extrapolation!
Actually not, Richard, since the 30% is an average and the Treasury rates income tax as imposing the highest deadweight loss. There is no doubt in my mind too that the effect is concentrated at the lower income level. I’m not against income tax but I would like to see the threshold raised to the average wage, which would be possible with near 100% collection of land rent, and after replacement of all other property taxes.
isnt it more likely that people didnt earn as much due to the recession? look at the banker bonus discussion going on currently for example – their bonuses are down, and some senior execs are not taking bonuses at all due to the publicity.
whilst there might be an element of “avoidance” or planning here I seriously doubt its going to have as big an impact on the tax take as the recession has generally.
As a Tax practitioner myself may I suggest an alternative to the 50p rate? That is a 30p rate. The trouble is that there is such a cliff edge passage between 20p and 40p and now 50p coupled with spikes in NI which practically begs for avoidance. Has any analysis been done on a middle rate?
I think it’s a good idea….
There is a letter in the FT today which postulates a sinusoidal (‘S’) shaped tax rate progression (see http://www.ft.com/cms/s/0/806e4436-6931-11e1-9931-00144feabdc0.html#axzz1ohvLimOJ if you can).
It looks like a proposal for outsouyrcing tax assessment and collection to me under a devious disguise
No thanks…..