A number of papers report today that George Osborne is minded to replace the 50p tax with Gordon
Brown’s original proposal: a 45p tax. How the ex-PM will be laughing. As he knows, even the 45p tax will lose money — that’s why Labour didn’t raise the top rate until the final four weeks of
its 13 years. But the Tories haven’t worked that out yet, and the Treasury is still working on the false assumptions he programmed into it.
In short, the amount of money that either tax rate will raise depends on what’s called the “taxable income elasticity,” or TIE — a figure suggesting how responsive various taxpayers are to rate changes. It varies for income groups. The lower-paid are less able to move their labour or money around than the rich. As various countries across the world realised this, they worked out that the best way to squeeze the rich was by lowering their tax rate. Here are a few examples:
When Brown originally proposed the 45p rate, the IFS said it “will raise approximately nothing,” publishing a Laffer curve which suggested the existing 40p rate was optimal:
This is based on the behaviour of the richest 1 per cent in response to tax changes in the 1980s. Even if we assume that the ultra-rich are no more globalised, no better able to move themselves and their money, than they were a quarter of a century ago, then 40p is as high as you’d go.
To pretend that the 50p tax would raise cash (a whopping £2.4 billion in fact), HM Treasury used an even lower elasticity ratio. A second fiddle was to assume that raising income tax rates would not affect revenue from any other taxes (VAT, for example). In Britain, such dodgy fiscal assumptions by the government are not scrutinised by Parliament. It took a Freedom of Information request by the IFS to expose what had been done. Brown knew how much power one can wield by tweaking assumptions in a Treasury formula. The assumptions used to create the 50p tax were clearly bogus, but they were the only way the government was going to make the case for it.
When I heard that Osborne was proposing a review to see if 50p raised money, my heart sank. Such a review is impossible because one cannot separate the effects of high tax from the effect of recession — as we saw when California raised the top rate at the time of the dot com bust. I have no idea how the Treasury will pretend otherwise when it produces its report.
The only meaningful study is to work out the true taxable income elasticity of the rich, to produce an up-to-date version of the above IFS graph, and assess the effects on broader economic growth. I suspect HM Treasury will not want to do this. Its decision to fiddle the original 50p tax calculation was borderline fraudulent. It will not want anyone’s attention drawn to it.
Personally, I don’t much care about the very well-paid. But the 50p tax is an act of sabotage, a trap set by Brown which Osborne walked straight into, and is still caught inside. Brown bet, correctly, that the Tories would be so paranoid about being seen to help the rich that they would not dare contradict him. That Osborne would only see the politics, and could not work out the economics. Brown, for all his defects, understood both, and it was precisely his greed for taxes that led him to keep the 40p rate. As he knew, and once told Labour conference, that was the way to squeeze most revenue from them.
The Treasury is denying the 45p reports today. Let’s hope that’s right, and that they are conducting a proper review into how much lower the top rate should be. Otherwise, it would suggest that Osborne is still — whether wittingly or not — working within intellectual parameters set by Gordon Brown.
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