Can we work out whether the 50p tax rate raised money?

50p

Photo: Howard Stanbury/Flickr – Creative Commons license

The debate following the commitment made by Labour Party Shadow Chancellor Ed Balls of restoring the 50p tax rate for the top earners has been emblematic of how politics and electoral campaigning are played out in the media.

First a party leader, comes out with a policy announcement, backed up by figures and often a new study assessing its financial impact or implications.

Not long after, other party leaders, using a different set of figures or perhaps taking a very different interpretation of the available data, attempt to show why their counterpart is wrong, demonstrating that in fact it is their own plan has the taxpayers best interests at heart.

This will often continue for months on end, with the different sides trying to poke holes in the other’s stats, while both sets of figures highly unlikely to show the full picture, cherry picked to within an inch of their statistical lives.

When it comes to the 50p tax rate and its potential benefits or pitfalls, evidence used to back up each side of the argument have cited two rather different reports, which came out at different times.

Ed Balls/Labour:

“Latest figures from the HMRC show that people earning over £150,000 paid almost £10bn more in tax in the three years when the 50p top rate of tax was in place than was estimated at the time when the government did its assessment back in 2012.”

Chancellor George Osbourne:

“The direct cost (of reducing the top rate from 50p to 45p) is only 100 million pounds a year. HMRC calculate the loss of other tax revenues may cancel that out. It raises at most a fraction of what we were told and may raise nothing at all.”

So who should we believe?

The answer is… well, probably no one.

In customary fashion, Tim Harford, the Financial Times undercover economist and presenter of Radio 4’s “More or Less” programme that investigates the numbers in the news, said in the latest edition of the show:

“If only life were so simple…  and all the taxable income in the country was a delicious gigantic cake and all the Chancellor had to do was decide how big a slice to take. However, taxable income is a moveable cake, it’s a cake that shrinks from the taxman’s cake slice and grows again when the taxman is out of the room.”

Ed Balls cake

Can Ed Balls have the tax cake and eat it too?

Photo: Tattooed_Mummy/Flickr – Creative Commons license

Essentially the main point here is that taxable income changes in response to tax rates. This is especially true in the case of the 50p tax rate, as both its introduction in 2010 by Alistair Darling and George Osbourne’s decision to cut it to 45p were pre-announced.

This allowed for major behavioural responses as people adjusted how they paid their taxes, bonuses and collected dividends based on the rate at the time, either by paying them early in anticipation of the impending tax hike, or forestalling and waiting to collect it later when it was dropped.

It was in place for such a brief time that it tells us very little about “how much it might have raised in the long run when everything had settled down”, according to the analysis by More or Less.

Data journalism site Ampp3d have done a good job in explaining the debate here, raising the issue of other factors at play, not just the revenue raised by the 50p tax rate.

They also analyse how many people a reintroduction of the 50p tax rate will potentially affect, comparing it to other policies and of course answer the question on everyone’s lips, how its potential introduction will affect Wayne Rooney. This is a great way to provide context to the debate.

Given how tough it is to draw conclusions, especially considering the uncertainty surrounding income tax revenue as a whole, (according to More or Less studies by the Institute of Fiscal Studies show that the top rate of tax at which the Treasury would scoop up the absolute revenue could be as low as 30p to as high as 75p), it is unlikely that a definitive answer is likely to emerge anytime soon.

In the next year we will undoubtedly have these stats thrown at us time and time again, used to back up the respective arguments.

Therefore, it’s important to acknowledge that most probably these figures are being used to reinforce an ideological point of view ahead of the general election rather than the result of having studied the facts and adopted a position through a clear and thorough data analysis.

If you haven’t already, definitely worth listening to the full version of More or Less, available here

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