The truth about whether to cut the current 50p top rate of tax, is that no one actually knows whether it has affected the behaviour of the top 1% of income taxpayers in a substantial long term way. Even the government’s claim that it has raised less revenue is weak, because it has only one year’s worth of data. Many of those people may have brought their incomes forward to pay under the old rate meaning that this year’s sum will be lower than expected, or alternatively they may be legally avoiding paying by holding off or deferring their income until after the change.
In addition, if there is less tax coming from the top rate of tax last year than expected, there will be numerous possible reasons for this – from a flagging economy last year, a rise in inflation or VAT. Will the government bring back the 50p rate if after one year the 45p rate brings in less money?
The issue of taxing the rich is ultimately horse-trading. The government are asking the high earners to pay more income tax to them than legally avoid doing so, by an arrange of methods from converting their income to only paying capital gains tax, or increasing their pension contributions instead or using companies (whereby they pay themselves in dividends, loans or bonuses0.
There is a legitimate argument from those on the right that taxable income elasticity – the behavioural effect of tax changes – during the 1980s suggests that we won’t raise any more money above the 40% top rate of tax. And there is also a legitimate argument from those on the right that we take in more money in taxes from the top 1% (almost three times as much) now than in 1979, since the top rate was reduced.
However, sadly the data used to support such arguments doesn’t accurately go back to periods of very high marginal rates when the economy was booming, such as during the so called “Golden Age of Capitalism”. Instead data only goes back as far as the mid 1970s when the UK economy was stagnating.
The government will likely use or even quote evidence like a report by the IFS published in 2009 responding to the then planned rise in the top rate, which pointed out that there was a legitimate case that only raising the top rate to 45p for the top 1% of earners would raise more money than the 50p tax rate. However, they also made the case that you could raise the top rate and lower the top rate threshold and raise even more.
By using Treasury figures that put current taxable income elasticity actually at a higher rate around 54% (not including indirect taxes or national insurance) for top income earners over £150,000 a year and 59% for those earning between £100,000 and £150,000; the IFS make the point that you could raise the rate between £100,000 – £150,000 to around 60% and raise more money than under the current 50% rate on income over £150,000.
It is right to say that this only raises a very small amount in total tax revenue, and we are all focusing on one very small measure in comparison to other revenue raising measures. However, when yesterday we heard an additional £2 billion in spending cuts on top of billions more already cut to those on considerably more humble incomes, the top rate of tax seems pretty fair.
Ultimately, the debate over the top tax rate is a bit of a misnomer. Are we honestly meant to believe that a small reduction in marginal tax rates at the top and not wider economic factors in the economy encourages productivity and growth but also helps raise tax revenue from top earners? During the 1980s and 1990s was it only the top rate of tax of 40% that increased the income of the top 1%?
There are those who argued that bankers were fleeing London for Zurich last year as a result of the 50p tax rate, an argument shattered by evidence that hardly any bankers have left. But this argument was always another misnomer, as even if there was a jump in British based bankers moving to Switzerland, we would not have known how many bankers came to the UK to replace them. Or alternatively how many other high earners from other sectors also did so during that time period (as we don’t record this information).
It is just a simple fact that regardless of the tax rate there will be people who move around from country to country to reduce their tax liability. But equally there will be just as many (if not more) who move to countries regardless of the tax rate.
To drop something such as the 50p rate without stronger evidence, suggests this could be just the first excuse possible to protect incomes of the richest by a party of the richest.