The 50p tax debate: Are we taxing off our nose to spite our face?

The new report from the IFS - the Mirrlees Review - shows that the 50p tax rate may lose the Treasury money.

At the time it was introduced, the 50% higher rate of income tax seemed appropriate. The country was in crisis mode, and we needed to do all we could to bolster the public finances; many people thought it was a fair measure to temporarily raise the rate that Britain’s highest earners pay on their income.

But that was 2009 – and times have since changed. We are not in crisis mode anymore, despite our flat-lining economy.

Attention has turned to how we can create jobs and boost growth, to get us out of the deep pile of economic mess we are in.

Like it or not, levying high taxes over the long term – confiscating a whole half of what a person earns – sends a negative message, that Britain is more interested in symbolic gestures than in supporting high earners who create jobs and provide much needed funds to the Treasury.

At the very least, it puts off the globally mobile high earners, who can choose where to live. At worst, it could encourage more tax avoidance, and discourage people from aspiring to earn more and go beyond the 50% threshold.

The Mirrlees Review was released on this week  carried out by the Institute for Fiscal Studies. The IFS is a non-partisan, well-respected economic and fiscal think tank whose data Left Foot Forward has often drawn upon to show how this government’s economic policy is wrong-headed or unjust.

Mirrlees looks closely at the effectiveness of the 50% tax rate on the highest earners (see pages 108-110, pdf). Only 275,000 or so people are effected by the top rate of tax, but it is a very important segment of the economy; as the IFS report points out, 25% of all income tax received by the state comes from this segment of the population – and they account for just 1% of all taxpayers in the United Kingdom.

They also constitute very ‘responsive’ group. They have more options when it comes to how they earn their money and take their remuneration than most people do. Therefore, they are more able to legally avoid paying the top rate of tax. As the report states, there are high earners from other countries who might be put off from coming here in the first place.

It is clearly possible that a 50% top rate of tax actually results in a net tax loss for the state than a net gain, as that income bracket can so easily find ways to avoid paying it – and high earners we would like to attract as a nation would be put off from relocating here.

Instead, the IFS suggests that the income tax base could be widened by simplifying the tax code and removing loopholes and tax reliefs. Such measures would reduce the ability to avoid tax and would make one of the world’s most complex tax systems more simple.

High taxes may feel comfortable for many of us on the left, but if they end up reducing the number of pounds that come into the Treasury,what is their worth? Symbolism? Even if that stubborn symbolism costs us hundreds of millions as a nation?

Raising taxes might feel natural to many, but there’s no conclusive evidence that the 50 per cent rate has worked. We may well be cutting off our nose to spite our face.

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25 Responses to “The 50p tax debate: Are we taxing off our nose to spite our face?”

  1. Evonne O

    Wow, totally unexpected from Left Foot Forward: http://t.co/cI8QuYDZ

  2. Neill Harvey-Smith

    Yes. You're getting it! The 50p rate should go. http://t.co/tQ41Pdc1

  3. Political Planet

    The 50p tax debate: Are we taxing off our nose to spite our face?: The new report from the IFS – the Mirrlees Re… http://t.co/IXG3b2iT

  4. House Of Twits

    RT @Boris_Backer Left Foot Forward: The 50p tax debate: Are we taxing off our nose to spite our face? http://t.co/SmpSXxcb <– Wow.

  5. Craig Barrett

    Left Foot Forward: The 50p tax debate: Are we taxing off our nose to spite our face? http://t.co/Z50X0cul <– Wow.

  6. Nic Conner

    Wow, totally unexpected from Left Foot Forward: http://t.co/cI8QuYDZ

  7. JamesTarbit

    RT @leftfootfwd: The 50p tax debate: Are we taxing off our nose to spite our face? http://t.co/bnRdgFxR <- sensible

  8. Oliver Deed

    @LukeBozier has written fine piece 4 @leftfootfwd here: http://t.co/2GprbeCg. I wrote similar piece 4 @LabourList here: http://t.co/C12iH6RM

  9. Francis Hoar

    @LukeBozier @wdjstraw Well done. Brave to admit this. RT“@nhs999: Yes. You're getting it! The 50p rate should go. http://t.co/CNM8rdEt”

  10. Claire Beenham

    RT @Boris_Backer Left Foot Forward: The 50p tax debate: Are we taxing off our nose to spite our face? http://t.co/SmpSXxcb <– Wow.

  11. Dan

    look at this article from labor party member luke bozier. just look at it http://t.co/cR6wJR0c

  12. Ash

    “It is clearly possible that a 50% top rate of tax actually results in a net tax loss for the state”

    It’s possible. It’s also possible that it results in a net gain. We don’t know where the Laffer curve peaks – though I think most estimates have put it closer to 70% than 50%. A judgment call that raising the rate from 40% to 50% will raise revenue is not unreasonable.

    “Instead, the IFS suggests that the income tax base could be widened by simplifying the tax code and removing loopholes and tax reliefs. Such measures would reduce the ability to avoid tax”

    Why “instead”? If one of the worries about the 50p rate is that it incentivises people to avoid tax, and if it’s possible to reduce their ability to do so, why not use anti-tax avoidance measures to cancel out that revenue-reducing effect among £150,000+ earners while raising additional revenue from the much larger number of people earning £50,000 or £100,000?

    Right-wing arguments of this sort always strike me as being riddled with contradictions. *Either* high tax rates have the intended effect of *reducing* the net incomes of high earners (thus incentivising them to leave the country), *or* they have the unintended effect of *increasing* the net incomes of high earners (by incentivising them to take advantage of readily-available tax-avoidance measures). Not both.

  13. Dave Citizen

    Setting appropriate tax rates is about far more than a narrow analysis of total revenue under particular rates. Tax rates are part of a much wider context of how work is incentivised and wealth is distributed within Britain.

    It’s our Government’s job to ensure the country’s land, property and other productive assets are not being accumulated for private interest at the expense of the wider society and that all people have the incentive to contribute towards the common good. All the evidence suggests that countries with extreme levels of inequality like the UK do worse than more equal societies. If some people are currently clinging to too much of the pie and are avoiding giving enopugh back then we need to do something about it quick – not narrowly focus on the single page of tax revenues under a 50p rate!

  14. Dave Citizen

    Well said Ash.

  15. Ash

    Interestingly, I’ve never heard a right-winger come out with the following argument:

    “We should be aiming for a situation in which high earners are handing over less of their money to the Government, so that they have more money available to invest privately in ways that generate jobs and growth. One of the best ways to reduce the amount of tax high earners pay is, counterintuitively, to increase income tax rates on those earners. That’s because when you increase their income tax rates, high earners are incentivised to make better use of readily-available tax-avoidance measures – meaning they actually end up paying *less* tax overall. So let’s increase income tax rates on high earners.”

  16. Tim Worstall

    “We don’t know where the Laffer curve peaks – though I think most estimates have put it closer to 70% than 50%.”

    Perhaps you should read the IFS report then where Mirrlees discusses exactly this. 54% is the number he says is that best estimate and that includes NI etc (employers, of course for employees is capped well below these income levels). Which implies that 40% income tax is the revenue maximising rate…..as he actually says in the IFS report.

    Worth reading it, eh?

    And the reason we don’t say this:

    “That’s because when you increase their income tax rates, high earners are incentivised to make better use of readily-available tax-avoidance measures – meaning they actually end up paying *less* tax overall. So let’s increase income tax rates on high earners.””

    Is because it’s a blindingly stupid argument. Only some of the reduction in revenues is because people try to dodge tax. Another section of it is because people take more leisure rather than trying to make money, another part because people bugger off and a final part because people never bother to come here.

    Your “very clever” argument only adresses one of the four…..

  17. Dave Citizen

    Income tax can only ever be part of the equation of incentivising productive work and getting surplus capital reinvested in the right places (right from the perspective of general and sustainable prosperity not narrow private interests of course).

    We need to be discussing the issue of income tax rates within the proper context of the allocation of land, property and labour ‘resources’ to the most productive uses. As things stand, much of the country’s resource base is wasting away, serving narrow private interests at the expense of general prosperity.

  18. matthew fox

    Why do Conservatives use the ” Your having a Laff ” curve.

    How many 50p tax rate payers have a Swiss Bank accounts, and want a tax cut as well.

  19. Leon Wolfson

    Tim – Yes, I’ve read it. It makes ludicrous assumptions.

    Much of the income on the rich doesn’t pay 50%, it pays 28%. Let’s eliminate the artificial distinction between types of income, and reduce the overall rates to bring in the same amount of revenue. Oh look, NOW the rich are paying a much fairer share, AND the tax rate is below 50%. Win/Win!

  20. Ash

    Tim Worstall

    “Only some of the reduction in revenues is because people try to dodge tax. Another section of it is because people take more leisure rather than trying to make money, another part because people bugger off and a final part because people never bother to come here.”

    Hmm.

    I can see how you can consistently claim that tax avoidance doesn’t itself lead to any reduction in revenue – i.e. taking only tax avoidance into account, the tax take would rise or stay the same if the rate of tax were increased – but that in fact the tax take falls when tax rates rise because of the other factors you mention. But if you want to claim that tax avoidance *does* contribute to a fall in revenues – so that that the tax take would fall when taxes were increased even if none of those other factors were in effect – the picture looks very odd. On the one hand you have enough high earners avoiding enough tax that the effective tax rate on that group can be said to have fallen (since the Government is collecting less tax from them); but on the other hand that same group supposedly has a new and powerful incentive to take more leisure and move/stay overseas. Why? If the effective rate at which their labour is taxed has just fallen – which it has, if tax avoidance plays *any* part in reducing revenues – isn’t working in the UK going to seem more worthwhile rather than less?

    Sorry, but the whiff of self-serving rationalisation in this area is just overwhelming.

    “What’s that? You think the government is collecting too much tax and spending too much money? Ah, the thing to do there is to cut spending so that you can reduce tax rates.”

    “What’s that? You think the government isn’t collecting enough tax and doesn’t have enough money to spend? Ah, the thing to do there is to reduce tax rates so that you can increase spending.”

  21. Jed Miliband

    The 50p tax debate: Are we taxing off our nose to spite our face?: http://t.co/0g6wqi6F : writes @lukebozier #50ptax

  22. Awake!

    the tax rate at 50% makes the Uk economy less attractive relatively to other economies. That’s a simple arithmetic fact, and high earners are bothered by things like this. So they are leaving, and some not coming…
    Yes annecdotal evidence is only ever that, but we dismissed many annecdotal stories of the building asset bubble in the Brown/darling years and look where that got us- also, with emigration, isn’t it ever annecdotal? Is it really possible to statistically ‘capture’ the top 1% leaving? So actually annecdotal is all we do have to go on. Brain drains have happened before, and it’s happening now.
    Where’s the evidence? erm, well this topic seems to run on and on.
    incidentally- my neighjbour went to live in Switzerland, and so has a mate. Another is thinking of going back to Sweden(!), his Sal already having left. I have made the decision that business timing and school timing sorted, we will go as well. I know of 2 others very seriously considering the move, and have swiss friends telling me how full of Brits swiss is currently..
    but hey, a socialist will never concede he’s wrong even if the roof is caving down on him. The fact is that using static data to measure a change in tax take relative to a rate of tax, when the object of the research is to establish what the IMPACT OF THE RATE CHANGE IS, is not possible, not conclusively. ask a statistician, this isn’t hard stuff.

  23. Time to move beyond the eurozone | Left Foot Forward

    […] voice? The first week of the party conference season has seen both he and the Liberals focus on the 50p rate of tax – a complete irrelevance in fiscal terms – but the real issue of the euro scarcely […]

  24. Francis Hoar

    @PatrickOsgood Read the IFS Mirrlees Report, helpfully cited in this blog by @leftfootfwd http://t.co/CNM8rdEt

  25. It's official: the 50p tax rate raises revenue | Left Foot Forward

    […] The 50p tax debate: Are we taxing off our nose to spite our face? – Luke Bozier, September 16th […]

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