Fraser Nelson is wrong on the 50p tax rate


Tuesday’s Public Sector Borrowing figures came in ahead of expectations, driven by bumper income tax receipts.

Fraser-Nelson-wrongOver at the Guardian website I argued that this partially represented the impact of the 50p rate:

“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 per cent 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 [National Insurance Contributions] 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.”

Chris Dillow, on the Investors’ Chronicle website, wrote:

“The biggest reason for this is that income tax revenues are booming. The OBR predicted that they would rise 3.1 per cent this year. In fact, they are up by eight per cent, bringing in an unexpected £5.6bn for the Treasury.

“This hasn’t happened because the labour market has been stronger than the OBR expected. If this were the case, national insurance contributions would also have exceeded expectations, but in fact they have been the one major revenue source to have undershot their prediction; VAT and corporation tax are slightly ahead of forecast.

“So, what’s happened? One reason is that bankers’ bonuses have been unusually large. The other, more intriguing one, is that the rise in the top rate of tax, far from causing an exit of high-earners, has in fact raised revenues because we are on the upward-sloping part of the Laffer curve where higher taxes really do bring in more revenue.”

Over at the Spectator Coffee House blog, Fraser Nelson was quick to claim that this was not the case:

“A jubilant John Rentoul has just tweeted:

‘Where is Fraser Nelson when you need him? The 50p income tax rate has brought in a ton of money. He said it would probably reduce revenue.’

“He is absolutely right – but not for the reasons he thinks. Were John self-employed, he’d know that the tax paid last month was in respect of the 2009-10 tax year – when the top rate of tax was 40p.

“Of course, many of the super-rich are on PAYE – but that has happened since last April. It doesn’t explain a January uplift.”

This point has since been echoed by the TaxPayers’ Alliance, the Adam Smith Institute and Tory bloggers.

There are two problems with this explaintion. First that it does not explain why income tax receipts have increased in advance of earnings or employment growth each month since April 2010 (when the 50p rate was introduced) and second that it is factually wrong.

Fraser Nelson appears confused about how self assesment actually works. Had he consulted the HMRC guidance before writing his post, this confusion could have been avoided:

“You’ll usually have to make ‘payments on account’ of the current year’s tax. You’ll have to make two payments, one by 31 January in the current year and the other by the following 31 July. Each payment is half of the tax due for the previous year.

“For example, for the tax year 2010-11 (6 April 2010 to 5 April 2011) the first payment on account will be due on 31 January 2011. The second payment on account will be due on 31 July 2011.”

In other words, self assessment payments received in January did include tax receipts related to the year 2010/11 and hence a 50p effect.

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  • http://jruddy.wordpress.com John Ruddy

    I think we need to rename them wrong-wingers

  • Richard

    Nice work Duncan. As if I’m going to bother wasting my time reading the response by the TPA, infamous for its suspect statistics and explanations.

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  • h

    sorry but you are lamely linking to hmrc guidance without understanding it and are simply wrong – payments on account are made in january and july and are based on half your prior year tax bill. no more (but under certain cirmcumstances less). they empahatically arent a prediction of what tax you might pay the following year if rates and your income change. if you read his article, he knows this because he is self employed (and i say this as a self employed accountant)

    there might be some benefit to paye receipts in jan from the 50% rate on city bonuses, but year on year it isnt from payments on account

  • h

    and, to be fair to Nelson, thats exactly what the hmrc text you copied says – we wont win this argument without understanding the facts

  • Mr. Sensible

    “2.I think we need to rename them wrong-wingers”

    I think you’re probably right, John.

    We’ve heard all this somewhere before.

  • RM

    H is correct.

    Mr Weldon your journalism is lazy / sloppy. Go and re-read the web page you linked. Then apologise to Mr Nelson and the folks at the Taxpayers Alliance.

    As an aside, I’m not sure that PAYE yet takes into account the 50% rate either. I received a letter from HMRC warning me that PAYE tax codes had not been adjusted to collect the additional tax rate (i.e. I’ll have more tax to pay with my annual tax return due in Jan 2012).

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  • Tony27nine

    I think that you’re missing the point. I’m a signatory to the scrap the tax letter and I’m not affected by the 50p rate I the past two and a half years I’ve created 55 new jobs. Let’s as a nation try to get away from making this an argument about “the rich”. We need to encourage people to the UK to set up business and help us reduce the huge unemployment problem. Yes, the 50p MAY raise revenue but the answer for the economy isn’t to keep letting unemployment rise and keep raising top end tax rate to pay for it. The only logical conclusion is a country with 10 million unemployed and the richest paying 100% of their top slice of earnings to cover the cost – not the result most people would go for!! We ned to make this a country that’s attractive to job-creators. We also need to have a tax system that’s fair. The effective top rate of tax is around 55% in this country if NI is taken into account. The top 1% of earners pay 28% of the tax – I think that’s fair as do most right thinking people. Let’s ditch the politics and start thinking about what’s going to get us working again. Unemployment isn’t just a financial burden on the country, it’s demoralizing for those seeking work, it creates a generation of youth who don’t get into the habit of work on leaving school and who instead lose the chance to become independent, motivated, confident contributors to society and instead become resentful and dependent.
    When all the numbers come out I’m sure we’ll see that some extra tax was raised – the jury’s out on how much. What we’ll never know is how many jobs we missed out on – but then we’ll all be too busy counting the extra unemployed…..

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