Income tax: the additional 50p rate ( PDF, 41 pages ... - Parliament

Work by researchers at the IFS prepared the Mirrlees Review had suggested a TIE of 0.46, 99
and academic studies using US data “have shown that TIEs tend to be higher for those with
higher incomes as they engage more in tax planning and are more mobile.” Moreover, the
data the department had received on payments made under self-assessment for 2010/11
suggested a much greater behavioural response than initially expected. Overall, incomes
among those with incomes above £150k increased 14% in 2009/10 but fell 25% in 2010/11.
This trend was strongest for dividend income – which grew 78% among this group in 2009/10
and then fell 73% in 2010/11. 100 To ascertain the impact of the 50p rate the department had
to make an estimate of the counterfactual to these figures – how incomes would have grown
if tax rates had been unchanged. Then, in looking at how receipts would be affected by
future tax changes, it was necessary to make allowance for the fact that forestalling – simply
moving income from one tax year to another – would have a short-run impact on receipts,
compared with other behaviours (such as emigration).
All told the department estimated that the 50p rate had raised about £1 billion at most:
behavioural responses had decreased the yield from the 50p rate by at least 83% - an
implied TIE of 0.48. As they concluded, “these results are more in line with those that would
be produced using the behavioural response estimates contained in academic literature. This
conclusion is also consistent with the £3.6 billion shortfall in Self Assessment tax revenues
observed in January and February 2012 (the months in which balancing payments relating to
2010-11 liabilities are received).” 101
The last step was to use this estimate of taxpayer responses to estimate how much the
Exchequer would lose from cutting the 50p rate. In general studies of TIEs have not taken a
consistent approach on whether taxpayers would react differently to rate reductions to rate
increases – though there are some reasons to doubt that their behaviour would be
symmetric: “Up-front investment in tax planning could lead to some “stickiness” when the
income tax rate is reduced – for example avoidance scheme would still be more tax efficient
and may have been setup to operate for a number of years. Taxpayers who shifted to
evasion behaviours may still under report their income. Where individuals have migrated it is
possible that they may not moved back to the UK.” 102
The department elected to use a slightly lower TIE of 0.45 – and based on this, estimated
that setting the additional rate at 45p from 2013/14 would only lower total yields by about
£100m a year. 103 At this time many commentators noted this was a critical assumption –
including the BBC’s economics editor Stephanie Flanders:
There is clearly room to wonder whether the behavioural change will be symmetrical. If
you have spent a lot of money setting up a company, for example, to avoid the 50p
rate, it's not obvious you will break that up now the rate is 45p. On the other hand, it's
plausible that some other money will come back into the system. It really is too soon to
say. What is certain is that millions of basic and higher rate taxpayers people will pay
less tax next year as a result of this budget. And that the UK is less than half way
through an unprecedented seven-year programme of tax rises and spending cuts that -
99
This work is discussed in section 1 of this note.
100 HMRC, March 2012 p20, pp28-9
101 op.cit. p45
102 op.cit. p23
103 op.cit. p51
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