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?”
Dan
look at this article from labor party member luke bozier. just look at it http://t.co/cR6wJR0c
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.
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!
Dave Citizen
Well said Ash.
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.”