Tag Archives: 50p tax

Ditching the 50p rate: the economic and the moral case.

24 Sep

Or, why the economic case is mostly bollocks and why whinging self-pity doesn’t work if you earn over £150,000

You may have recently noticed right-wing publications’ decorating their front covers with headlines such as “Hunting the Rich” or “GET THE RICH!!!”  Perhaps you have seen the Spectator’s recent image of a pinstriped gentleman running from a baying mob, torches a-flame, pitchforks handily at the ready, or the Economist’s current portrayal of wealthy fellows fleeing from red-jacketed hunters on horseback, presumably about to be savaged by the barbed teeth of rabid hound dogs.

You may conclude from this that Britain is in the stages of some 1793-style fetchez-les-riches blood feud, wherein those greedy aristos might not by Human Rights Law be allowed to be publicly guillotined, but they are politely heckled at least!  Our glorious leaders de la Patrie – whether l’Ed de la Rouge or Eddie Boules or Roi Appelez-moi-Dave XVI – might not be threatening a Terreur sanglant, but at least they are threatening 10p more in taxation!

This is what the row is over: should we ask the wealthy to pay 50% of any earnings they make over £150,000?  The right-wing press, along with a horde of letter-writing economists, have decided that the 50p rate damages growth and should be cut back to 40p, the rate from 1988 to 2009.  Some right-wing commentators have even asserted that the 10p difference is a moral outrage.

This is mostly drivel.  There is no good evidence to make an economic case and the moral case is mainly selfish whinging.

The economic case

When a recent review of tax policy from the Institute of Fiscal Studies came out, the Mail led with the headline of “50p income tax rate ‘costs economy £500m a year as high earners move their cash abroad’”; the Telegraph led with “50p tax rate ‘costing Treasury £500m’”.  One would assume from this that the IFS review said that 50p rate would cost the Treasury £500m.  Yet this £500m figure wasn’t cited anywhere else in either article.  Furthermore, the figure didn’t appear in the original Review.

So where did it come from?  The answer is that, referenced in the footnotes on p109, is an IFS report from 2009. On page 14 is the following graph:

The dark black line indicates the author’s estimate for how the Treasury’s tax revenue changes when the income tax rate is changed.  Read it off at 50% tax rate and – lo and behold – it costs the Treasury about £500m!

There are two things to be noted at this point: first, the line is based on an estimate of elasticity of e=0.46.  How did they work this out?  The answer is to be found in yet another report from 2008 – stay with me – where the authors note the change in tax policy in the 1980s and consider how the richest 5% and richest 1% responded to this.  It could be argued, the authors say, that other factors influenced the rich’s response, such as other Thatcherite reforms that favoured the rich.  Moreover, the estimate is based on limited data.  This means the estimate is “very preliminary” and “tentative” (pp. 15 and 18).

Second, there is a ⅔ probability that the elasticity is between e=0.33 and 0.59 (as shown on the graph).  This means that there is a 67% chance that the 50p rate will do anything from raking in £1.2 billion to costing the Treasury £2.5 billion smackers!  Even more bizarrely, there is a 33% chance that the tax revenue will lie outside this range.

These estimates – the best estimates we have, incidentally – are thus utterly useless.  We have no idea how much revenue the 50p tax will raise.  Even if the Daily Mail headline was 50p tax rate could cost Treasury £500m, this would be so far removed from anyone’s use of the word “could”, they may as well have printed: George Osborne could read the budget rubbing Yakult over his breasts!

 There are reasons to believe the 50p tax rate won’t raise much money.  The rich aren’t likely to work any less hard, but there are other ways the rich could escape the tax.  They could invest money in tax avoidance, they could pile their income into pensions or capital gains, or they could leave the country altogether.  On the other hand, cutting the top rate of tax won’t make those people decide to return to Britain or quit tax-avoidance schemes when they are still profitable.

The revenue the tax will raise is “certainly uncertain”, as the IFS has said.  This is why it would be wise to wait for HM Revenue & Customs to report next year on how much it has raised.

The moral case

Right-wing commentators make the case that, regardless of the numbers, it is an injustice in this harsh economic climate for the super-rich to pay 10% more of their income.  A director of the Adam Smith Institute called it “coercion”, saying the tax will “make people into liars and cheats”.  After Obama pledged to raise the top rate of income tax to 39.6%, Fox News presenter Bill O’Reilly called the tax “oppressive” and threatened to leave the country if such rich-bashing continued.

How paying taxes can be called coercion when the rich have more freedom than any other citizen in the land, more liberties than they would in most countries in the world, is mind-boggling.  I don’t know how oppression feels when you have cars, yachts, jets, the most spectacular holidays and the most extraordinary houses, but I’m sure it’s harrowing.  If that’s oppression, I pray to God I’m oppressed.

If I had to, I mean if I were really pushed, I’d say that my sympathies were more with the poor.  The rich aren’t too bothered by inflation.  They’re not much affected by government cuts either: there are always private schools and private healthcare, after all.  But when gas prices have shot up, VAT has risen, unemployment is at 8%, and everything from benefits to local services to police numbers to pensions has been cut back, it’s a rotten time if you’re not well-off.  Call me a monster, but the super-rich have none of my sympathy.