Skip to content

The Unkindest Cut of All

March 16, 2012

I have been following the debate on the much ballyhooed cut of the top rate of tax with interest. The people debating it seem terribly intelligent and represent august and entirely neutral organisations like the Taxpayers’ Alliance and the Institute of Directors. Who am I to butt in?

I am no expert on the subject. But I have listened to the discussion and I have a couple of questions. They may be naive – forgive me.

The arguments against the 50p rate of tax for a personal income above £150k a year were explored in the Mirrlees Review by the Institute of Fiscal Studies (for which you can purchase corporate membership here – a measly £10k a year secures you guest speaker status at their events).

Brittania on the 50 pence coin has adopted many of the characteristics of the ancient Greek goddess Athena. Her helmet, her olive branch - sadly, not her wisdom.

As summarised by Polly Curtis, the report suggests that a 50p rate of tax would encourage those subject to it to minimise the amount they pay by

• Changing the form of their remuneration.

• Contributing more to a pension (maximum of £40bn) or to charity.

• Converting income into capital gains.

• Setting themselves up as a company.

• Investing in tax avoidance.

• Leaving the country or not coming here in the first place

 

The suggestion is that people on a personal income of more than £150k a year only optimise their tax affairs and take such measures at the 50p rate. It is a magical elasticity figure. So, since the rate is 50p at the moment, they are doing all these things right now. It follows that, as soon as the rate is reduced to 40p, they will all (or many will) stop doing these things. Is this the argument, really? REALLY?

I know several people on such incomes. They all employ terribly talented accountants whose sole mission is to explore ways to minimise the tax their clients pay.What is being advanced here is the absolutely incredible suggestion that, if the rate is reduced, rich people will turn to their accountants and say “don’t bother any more”.

No explanation is offered as to why during the 9 out of 11 years of Thatcher, when the top rate of tax was 60p to the pound, the country’s tax receipts did not go into spectacular collapse. Indeed it is never mentioned.

No discussion strays into an exploration of the incredibly advantageous corporate tax regime in this country – which an amateur like me might think provides an incentive for these captains of industry to be based here.

No comparison is offered to tax regimes internationally, many of which are displaying an appetite for taxing the rich post-2008. These people will simply up and go “somewhere else”. Bali-Hai, perhaps.

Instead we hear a lot about wealth-creation and trickle-down effects. Please note – the same effects do not apply to the poor. Someone on £160k a year is likely to put the grand they would save with a 40p rate back into the UK economy; to create wealth and trickle it down. But if one were to increase the benefits of somebody on the breadline by a grand – well… they are likely to squirrel it away under their wife’s name (who luckily resides in Monaco).

The argument, stripped down to its bare bones, seems to be “if you try to tax the rich, they are likely to work harder to avoid it, so let’s not bother”.  An argument which our Chancellor, apparently, takes fully on board.

16 Comments leave one →
  1. Jeremy Hughes permalink
    March 16, 2012 5:42 pm

    And thank you.

  2. March 16, 2012 5:48 pm

    Reblogged this on leftoflightwater and commented:
    I was planning on blogging on this over the weekend, but this explains it all much better than I ever could.

  3. March 16, 2012 6:25 pm

    We all know the tax system only hurts the poor …….. “your immune if your wealthy “……. The poor are taxed so much with VAT ,fuel tax ,council tax ,Electricity water and Gas prices etc that they may has well be in a communist system as they are left with nothing or very little at the end of each week.
    Any percentage tax system can never be fair .The truth is capitalism self destructs and thats a mathmatical certainty.
    So enjoy life the best you can and give to Rome what is Romes lv Mike.

  4. Anna Hedge permalink
    March 16, 2012 6:31 pm

    Hi.

    Some thoughts: this post highlights a confusion which often runs through debates on the taxation of high-earners, namely, what is the 50p rate for?

    Is it purely a method of raising revenue, a demonstration of the socially just nature of progressive taxation, or both? (There is another response, of course: the libertarian position that all tax is theft, but it’s Friday night and they bore me)

    Personally I think the answer is both: it’s financially worthwhile (or should be) and it’s a symbol of the principle that those that can do so, should pay more tax.

    If it’s the former, then evasion (illegal) should, of course, be treated like the crime that it is. No deals. Avoidance, especially if on the scale suggested by the Government’s argument requires either a tightening up of the law or a hard-headed recognition that this rate is not fit for purpose.

    If it’s purely a symbolic measure, then evasion still needs to be confronted, but avoidance may not alter the supposed symbolic power of the top rate. The problem this throws up, however is that as you’ve said it ‘involves an acceptance that some people are too rich to pay tax’. One response to this issue might be to lower the top rate band until you start hitting people who are not rich enough to afford fancy accountants. However, not only does this damage any symbolic value the top rate may have, but it also risks alienating the ‘squeezed middle’ who may well earn above the average, but who have been encouraged (not least by the media) to think of themselves as normal.

    Which brings me to the backdrop against which all of this plays out:

    We were repeatedly told in the aftermath of the riots that if people had broken the law they would have nowhere to hide. IDS makes repeated references to people ‘who play by the rules and do the right thing’ in his assault on the ‘benefit culture’ which is allegedly to blame for whole hosts of social ills.

    In floating the idea of a cut to the top rate of tax (& it’s important to remember that even if it materialises it is one measure out of an entire Budget), Osborne has tacitly made avoidance a fait accompli (unless he simultaneously beefs up HMRC and closes all the loopholes-don’t laugh, it might happen). He has also, if one accepts the symbolism of a top rate, sent a very clear signal:

    If we are all in this together, some of us are more in it than others.

  5. Keir permalink
    March 16, 2012 6:37 pm

    Excellent deconstruction, Alex. These policies melt like butter under the white-hot blowtorch of your unswerving logic. Bravo.

  6. March 16, 2012 6:38 pm

    Seriously? The maximum for a pension is £40bn? How is that even humanly possible?

    Talk about golden plated!

  7. Kaptain_Khaos permalink
    March 16, 2012 6:55 pm

    Again Alex, your eloquence is supreme. Succinct and marvellously to the point.

  8. March 16, 2012 8:09 pm

    I have never understood why the Right think there is no such thing as “trickleup”. Why a tax cut magically goes into the economy, but a pay increase for nurses is somehow wasted. It seems, if anything, it would be more likely to be recirculated (as you suggest with your Monaco point).

    Seriously: is there some clever economic argument that it somehow isn’t the same? Something about dead weight efficiency? Surely they’ve got something.

  9. March 16, 2012 9:46 pm

    I was a bit scared to read this to be honest – didn’t think I’d understand it, but then I thought – it’s Alex; if anyone can make it clear to me it’s the man who so beautifully took Cameron to task over the abuse of his late, disabled son. It comes to something when Thatcher’s administration looks preferable (that’s what you meant, right?) and just confirms that this administrations – tellingly made up of millionaires as it is – may well be the most greedy, unpleasant, self-serving bunch of politicians we’ve ever been at the mercy of. And that’s saying something. Thank goodness you did.

  10. March 16, 2012 10:29 pm

    Alex, there IS a difference between the effects of 40p and 50p. This is because top earners often have the option of reinventing themselves as companies and/or investing lots of their income. At 40p, the top rate of tax on dividends (42.5% excluding the 10% dividend credit, which a top earner with a one-man company effectively wouldn’t get anyway), is higher than the top rate of income tax. At 50p it is lower, so there is a much greater incentive to incorporate at 50p. Similarly with capital gains tax – if the top rate of income tax is considerably higher than the highest CGT rate, top earners have an incentive to invest more of their incomes. You might want them to do this of course – such investments are an important source of corporate funding – and I’d guess that’s why historically CGT has generally been lower than the top rate of income tax anyway. But the greater the difference, the more incentive there is to adopt investment strategies that divert taxation to CGT rather than income tax.

    • March 16, 2012 11:48 pm

      I understand what you’re saying Frances, but if it were that simple (and since it is open to any individual to be a one-person company) we could just equalize the two rates to make sure the right rate was collected. Or we could outlaw one-person umbrella companies whose sole raison d’être is tax avoidance. But it is not and we do not. There is a money cost and an opportunity cost involved in setting up and maintaining a one-person company, which your calculation does not take into account. The truth is the state, run as it is by the rich, quite likes a top rate that looks harsh but also provisions which ensure it is never actually paid.

  11. March 16, 2012 11:22 pm

    I seem once again to be reduced to saying “thank you”. You’ve said all I would have said, had I not been too lazy and ineloquent to say it. I’m grateful. I wish I had your talent for words.

  12. David Topple permalink
    March 16, 2012 11:27 pm

    Another good article.

    I get a bit tired of this argument that ‘if we tax the rich they will leave the country’. If that’s the extent of their loyalty to this society (i.e. they have NO loyalty to it) do we really want them here? Of course, the tedious argument (as always) is that ‘the rich’ will create wealth for everybody else via this curious ‘trickle down’ mechanism, so we therefore ‘need’ them here. Why is it assumed that you have to be wealthy already to create wealth in the future for you and for others? Many successful entrepreneurs who now employ hundreds or thousands of people had next to nothing when they started out.

    The great tragedy is that while ‘the left’ were imposing their will on society in matters of social policy (so we now have a Conservative PM who believes in ‘gay marriage’ etc), ‘the right’ managed to impose their stupid ideas in the fields of economics and finance – and to such an extent that we now have a Labour Party which actually believes in global capitalism and has managed to betray the people who used to be its core supporters. Absolutely amazing.

  13. Will permalink
    March 21, 2012 9:09 pm

    “If that’s the extent of their loyalty to this society (i.e. they have NO loyalty to it) do we really want them here?”

    Why should the rich show any loyalty to a society that treats them as pariahs for daring to make some money?

    • March 21, 2012 9:14 pm

      If for no other reason, then self-interest. There are some loons who suggest that the rich need roads to drive on, a fire service to put out their factories when Health and Safety is ignored, police to protect their property, a Health Service to keep their workers healthy etc. Just a thought.

Trackbacks

  1. Linksplat – 23/03/12 « Cubik's Rube

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 1,371 other followers

%d bloggers like this: