Labour are committed to increasing the top rate of income tax – from 45p back to the level of 50p.

But would it raise any money?

The Times(£) this morning reports:

“The 50p tax rate raised £1.3 billion less revenue in 2013 than initial estimates indicated, new figures have revealed.

“Tax paid at the top rate in 2012-13 was £38 billion, rather than the £39.3 billion previously suggested, according to the personal income statistics published by HM Revenue & Customs yesterday.

“The Conservatives claimed the finding vindicates George Osborne’s decision to slash the top rate, levied on all income earned above £150,000, from 50 per cent to 45 per cent in April 2013.

“Since then the treasury has netted a higher yield from the wealthy.

“The change was announced in March 2012, however, and the Institute for Fiscal Studies has pointed out that many rich taxpayers deferred reporting their income until the following year.

“This delay, with growth in the economy, is thought to account for the £48.4 billion that the 45p top rate is believed to have netted in 2013-14.”

The Conservatives in their cost analysis of Labour’s tax and spending plans had suggested the proposed tax increase would be revenue neutral:

  • The Treasury included in the Budget scorecard a cost of £110 million in 2015/16 from the reduction to the additional rate of tax from 50p to 45p. This was assessed by the independent Office for Budgetary Responsibility, which is supported by Labour, as a central estimate (HM Treasury, Budget 2013, Table 2.2, March 2013).
  • However, HMRC analysis of the effects of the introduction of the 50p rate (from 40p) also estimated that the negative impact on the indirect tax yield was £220 million (HMRC, The Exchequer effect of the 50 per cent additional rate of income tax, p. 44, March 2012).
  • So raising the additional tax rate from 45p to 50p again in 2015/16 would again reduce VAT revenues by an estimated £110 million.

That could still leave Labour with a popular policy, of course. The pursuit of a more equal society – or the politics of envy – means that some would feel better attacking the rich even if they are not materially better off by doing so.

But what if the revised figures prompted such cautious independent outfits – such as the IFS – to conclude that the probability of a 50p tax rate would be to reduce revenue?

What if Labour were then challenged on – even by the BBC – as to how they would finance their tax increase? More borrowing or sharper spending cuts? Would they cut defence, or the police, or schools or pensions or the NHS?

I suspect that at such a stage the populist class war appeal of the “tax the rich” message might begin to fade.

Any scrutiny Labour do face will probably be less than they deserve.

It is welcome that The Treasury now includes some dynamic modelling to allow for behavioural change which they provide their forecasts of the impact changes in tax rates will have on tax revenues. But all the evidence I have seen thus far is that it has been an underestimate. For instance they thought that cutting Corporation Tax would reduce revenue. Yet the revenue went up. The retort could be that with economic growth the revenue would have gone up anyway. That rather assumes we would have had the economic growth without the cut in Corporation Tax. What came first the chicken or the egg?


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