The 50% tax rate and Mr Osborne’s Department for Obfuscation (sorry, HMRC)


In his Budget speech the Chancellor managed to claim several contradictory things at once about taxing the rich. First, he claimed the 50% top income tax rate was raising almost nothing. Next he claimed it was damaging the economy anyway. And finally, he tried to convince us that raising 5 times as much tax from the over £150,000 a year tax-payers was a golly good idea.

The first claim is nonsense. True, it wasn’t raising as much as was originally expected – it was only about £1.1bn instead of £3bn plus. This was because of a monumental level of tax avoidance as set out in the HMRC report on the matter. Most sensible observers would note that most of this tax avoidance was short-term juggling of tax liability between years and would have soon been mostly eliminated. Indeed HMRC estimated the 2011 income from this tax should have actually been a staggering £6.2bn if not for the fiddling (p39).

HMRC claims that the tax avoidance caused a very small drop in GDP (about 0.2%). This presumably is the basis for Mr Osborne’s claim it damaged the economy. This is somewhat specious as it is pretty clear that real economic activity didn’t really change much, just how it was accounted for. In any case, it’s hard to see how a tax no-one was paying, apparently, was damaging the economy?

But if Mr Osborne’s claim were true, presumably  taking 5 times as much from this group would do 5 times as much ‘damage’ – minus 1% of GDP I presume?

The truth is the 50% rate would probably have settled down to the actual HMRC projections of about £6bn a year. The result of dropping the rate from 50% to 45% are set out in the HMRC report. This means a drop of revenue of over £3bn rising to over £4bn (see table, HMRC report p48).

HMRC then uses a series of highly dubious “behavioural” assumptions to erode this tax-take away to only £1.1bn, still a tidy sum unless you are Mr Osborne apparently.

Even if you just ‘split the difference’ between what the HMRC’s report says and the actual tax liability then cutting the rate by 5% will mean about a £2bn a year loss to HM Treasury. Or to put it another way, about twice what Mr Osborne took away from pensioners in this Budget.

There is a perfectly respectable case for doing away with the 50% rate of tax. It is not one I agree with, certainly not in the short-term. But it is not the case mr Osborne made today, which consisted of sleight of hand and spuriously ‘exact’ calculations.

One final thought, Mr Osborne said a a few sentences before he announced the cut to 45% that the 50% was only temporary but was justified on the basis that public sector workers were taking a pay freeze because of the fiscal crisis. As far as I’m aware, they still are and many are now facing “regional” pay cuts as well.

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About Prof. Colin Talbot

Professor of Government (Emeritus). Universities of Cambridge and Manchester, England.
This entry was posted in Whitehall. Bookmark the permalink.

3 Responses to The 50% tax rate and Mr Osborne’s Department for Obfuscation (sorry, HMRC)

  1. james.g.haddock@gmail.com says:

    Excellent analysis, cutting through the spin like a hero! This really is a millionaire’s tax cut…one in the region of £18 billion over the rest of this parliament…if it lasts!

    It’s a shame nobody else bothers to actually analyse these documents properly…mainstream media is a facile joke!

  2. Andy says:

    [corrected post]

    It is a good analysis.

    But the assumptions and spin around the other side also worry me. ‘Millionaire’ is being hurled around like an insult. People on all sides are now talking about ‘better ways’ to tax wealth, as if wealth is like smoking and tax is a good way to curb the evil of being wealthy.

    Let’s face it. Any percentage tax brings in more from high earners than lower earners if it is applied equally – avoidance being dealt with by other measures, of course. The 50% tax was an extra 10% expropriation from one section of the community, a section who are already paying more tax. The key question is, is the £2bn (or whatever) better placed in the hands of the government or in the hands of people who can spend it or invest it directly in the market? Does any government use our money as efficiently as they should?

    I’m a long way from this high tax bracket. I have to earn money, job by job, contract by contract. Once I get into the 40% tax bracket – which is really 50% already due to NI – it means that every job I do, more than half the income is taken by the government (with other taxes on business too). So I have to make a calculation whether it is worth doing, or just get by and have a bit more free time instead.

    People who advocate high taxes are almost invariably wage-earners, who don’t have to create value only to see it being eaten up by tax. For them the tax hit is compensated by the next pay rise that takes this into account. We urgently need to encourage risk-taking, entrepreneurship and self-employment in this country. The tax system is a major disincentive, as are the attitudes of people who regard the pursuit of wealth as somehow morally inferior to being on the public payroll.

    This may not be the right time, but the top rate of tax needs to come down towards 30% (i.e. 40%or so when you include NI). Then we’ll get the kind of entrepreneurial society we need.

  3. John says:

    You mention ‘highly dubious “behavioural” assumptions’ within the HMRC report. Is this not just an attempt to take the Laffer curve into account? (http://en.wikipedia.org/wiki/Laffer_curve)

    The Laffer curve appears to place a limit on government redistribution – obviously this will frustrate those motivated by equality or authority. But it tells us how to maximise the amount of help available for the poor without needing to resort to coercion (at lest, beyond that inherent in taxation itself).

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