March is generally Budget month, and so, as that month begins, the pundits are setting out their wish list stalls. Spectator editor Fraser Nelson, a persistent contrarian who doesn’t believe in climate change or that HIV begets AIDS, has extended his disbelief system to the 50p rate of Income Tax, which he asserts is “a bomb that a brave Chancellor would defuse”.
Royal Exchange, London
This tax is at the outset attributed to Pa Broon, which is always a difficult one when he had left the Treasury over two years before. Then it is held to be behind a “brain drain”, and “successive independent studies” are asserted to show that it is actually costing the Exchequer between £500 million and £4 billion a year. Actually, those successive studies show nothing of the sort.
As FullFact have pointed out, successfully maximising the income tax “take” depends significantly on what is called taxable income elasticity, that is, the percentage by which taxable income falls as the marginal tax rate – the rate on the next pound you earn – increases. If this figure is 0.46, then a top Income Tax rate of 40% maximises the tax take, and a 50% rate lowers it.
However, if the figure falls, then the tax take is maximised at a higher Income Tax rate, and even if it is higher – meaning a 50% rate would lose even more – that amount would not be anywhere near the £4 billion claimed by Nelson. It seems the folks at Money Week, who sniffily dismiss whatever the deeply subversive Guardian has to say on the matter, have not pronounced one way or the other.
Moreover, that Guardian piece points out that Treasury receipts for January 2011 showed an “unexpectedly large surplus”. Added to that is the characteristically sceptical view of Richard Murphy, who claims the support of Warren Buffett, one name to set the right frothing, given his deeply inconvenient stance and calls for more taxes on people like himself.
But what of Nelson’s suggestion that lowering the top Income Tax rate has brought more folks from abroad, attracted by the supposedly pro-business message this is held to send out? The problem here is that the tax cut was not the only influence at work: his figures come from 1989, which was just three years after “Big Bang”, the deregulation of financial markets in London.
The influx of outsiders – and that includes those in the UK who would not previously have been let through the door of most City institutions, as well as incomers from abroad – would have begun relatively slowly, hence his “11 immigrants in the top 100” for 1989 versus “16 of the country’s 20 wealthiest individuals” today. Nelson is adding a false assumption to his unproven tax take numbers.
Which suggests the conclusion got written first. No change there, then.