160329 Additional rate
  • What Osborne claimed… “Figures published this morning by HMRC contain, for the first time, the income tax data for 2013-14, which was when the 50p rate was reduced to 45p … The data reveal that in that year there was an £8 billion increase in revenues from additional-rate taxpayers.” So said George Osborne in Parliament recently. And so I reported in my ten-point preview of the Budget soon after. But commenters, including milesking10, picked me up on this. Did I not know that Osborne was being a bit misleading?
  • …why he claimed it… Well, yes, yes I did. My pre-Budget post was more concerned with the politics of Osborne’s claim – whether it would encourage other Tories to call for more tax cuts – than with the substance. So what about the substance? The graph above is a fine place to start. I’ve constructed it from the HMRC data that Osborne was referring to, as well as from their reports for previous years and projections for future years. You’ll notice the rise in revenue that Osborne bragged about. In the tax year before the 50p rate was reduced to 45p, about £38 billion was raised from additional rate payers. In the year after, it was £46,000. A difference of £8 billion.
  • …and why he’s wrong to do so. Osborne would have us believe that this was due to both his cleverness and some solid Laffernomics: that, by cutting the rate, he made it less likely that rich people would try to avoid tax, among other things, and therefore plumped up the Exchequer’s revenues. Except it wasn’t really. As various organisations have pointed out – including HMRC, on page 14 of this report, and the Office for Budget Responsibility more recently – the £8 billion difference between years would, in large part, have been down to people deferring their income. Instead of paying 50p on bonuses and the like in 2012-13, they waited to pay 45p in 2013-14. That would have made that year’s receipts look, in the words of HMRC, “artificially high”.
  • Would 50p have raised more? The question to ask is whether the 45p rate made more money in 2013-14 than a 50p rate would have. And the answer? As with all counterfactuals – particularly those involving the dynamic effects of taxation – there is a touch of the unknowable about it. The Treasury’s own assessment of the change (page 180, here) was that it would lose the Exchequer about £50 million in that year, and £100 million in subsequent years. Others say that the Exchequer will have gained by a similar amount. It’s all kind of marginal. In terms of the overall public finances, 45p doesn’t make much difference.
  • The Chancellor’s dangerous game. But it does make a difference if we go back to politics, which is where Osborne is dragging things with his exaggerated claims. Will the additional rate keep on bringing in similar amounts of money, as HMRC’s latest projections imply? It so, will the rate itself be to thank, or the rising number of people paying it? And what if revenues start going down? Will the same boasts be made next year? After the most recent Budget, and IDS’s subsequent resignation, the Chancellor shouldn’t want to bring these questions down on himself.