Economic Lessons in the News

50p tax rate 'failing to boost revenues’

The U.K. government is learning about the economic lesson that "if you tax something, you get less of it."  Following an increase in the top marginal income tax rate to 50%, tax revenues from high-income taxpayers are falling, and are not going up, as the Treasury somehow expected by ignoring the economic lesson that "people respond to incentives." A U.K. Treasury official explained the disappointing drop in tax revenues by saying it "was partly due to highly-paid individuals arranging their affairs to avoid paying the 50% rate."

By Robert Winnett, and James Kirkup

The amount of income tax paid fell sharply last month in the first formal indication that the new 50p higher rate is not raising the expected amount of revenue.

The Treasury received £10.35 billion in income tax payments from those paying by self-assessment last month, a drop of £509 million compared with January 2011. Most other taxes produced higher revenues over the same period.

Senior sources said that the first official figures indicated that there had been “manoeuvring” by well-off Britons to avoid the new higher rate. The figures will add to pressure on the Coalition to drop the levy amid fears it is forcing entrepreneurs to relocate abroad.

The self-assessment returns from January, when most income tax is paid by the better-off, have been eagerly awaited by the Treasury and government ministers as they provide the first evidence of the success, or failure, of the 50p rate. It is the first year following the introduction of the 50p rate which had been expected to boost tax revenues from self-assessment by more than £1billion.

Should the 50p tax rate be scrapped?

 Yes, it is damaging the economy and putting off entrepreneurs Yes, it is wrong that those who work hard should be penalised so heavily No, there is no evidence that a higher tax rate harms commerce No, the rich should pay their fair share in difficult economic times

Although the official statistics do not disclose how much money was paid at the 50p rate of tax, the figures indicate that it is falling short of the money the levy was expected to raise.

A Treasury source said the relatively poor revenues from self-assessment returns was partly down to highly-paid individuals arranging their affairs to avoid paying the 50p rate.

“It’s true that SA revenues are a bit disappointing — it’s still early, but it looks like there’s been quite a lot of forestalling and other manoeuvring to avoid the top rate,” said the source.

However, another Treasury source added that the tax deadline had been extended by two days because of industrial action at HM Revenue and Customs. Therefore, it was too early to begin assessing the revenues raised from the 50p rate of tax because about 20 per cent of self-assessment tax is paid in the hours before the deadline.

Francesca Lagerberg, head of tax at Grant Thornton, an accountancy firm, said: “My guess is that because the 50 per cent rate was flagged up in advance many taxpayers, particularly those with their own businesses, decided to extract dividends ahead of the change. It highlights the fact that high tax rates don’t always deliver high tax revenues.”

George Osborne, the Chancellor, is expected to receive a definitive analysis from the revenue on the 50p rate before next month’s Budget. The Liberal Democrats have insisted that it must stay because it is important to demonstrate that the rich are paying their fair share.

David Laws, a Lib Dem MP, has also suggested reducing tax relief on pensions for top earners.

The prospect of higher taxation on pensions comes as savers complain that low interest rates and quantitative easing have pushed down returns on savings and pensions.

Charlie Bean, the deputy governor of the Bank of England, last night insisted that those people should accept the pain as the price of restoring the wider economy to health.

The Confederation of British Industry, in its Budget submission today, urges ministers not introduce new levies on the rich, warning that the UK “will become a less attractive location for entrepreneurs and key employees”.