Thinktank dismisses Ed Balls's claims that 50p tax rate will help cut deficit
27 Jan 2014:
Institute for Fiscal Affairs says restoring rate for top earners will only raise about £100m
Institute for Fiscal Affairs says restoring rate for top earners will only raise about £100m
Ed Balls has said he
would temporarily raise the top rate of tax to 50% to help cut the
deficit. Photograph: Simon James/GC Images,
A respected thinktank has poured cold water on claims by the shadow chancellor, Ed Balls, that bringing back a 50p tax rate for top earners would help bring down Britain's deficit.
The Institute for Fiscal Affairs said restoring the rate would raise "a very small amount of money", or around £100m.
Balls and his Labour allies have argued that a temporary reintroduction of the rate for those earning more than £150,000 would create a fairer tax system at a time of restraint and that it would also help raise revenues to balance the books. Making his argument at the weekend, Balls cited HM Revenue & Customs (HMRC) data saying that people earning more than £150,000 had paid £10bn more in tax than previously thought in the three years the 50p rate was being charged.
However, his claims were disputed by the IFS in a note published on Monday.
The thinktank's analysis will be welcomed by Treasury officials, who have argued that the £10bn extra was not due to the tax rate being set at 50p. They say the new figure came because more people were earning higher salaries in that period than previously thought, so there were more high salaries on which the 45p rate could be levied.
Many of the arguments about what a 50p rate can raise centre around the so-called behavioural response it might prompt. Many business groups, for example, argue it would drive away investment, dampen Britons' entrepreneurial spirit and increase tax avoidance and evasion.
The IFS director, Paul Johnson, and his colleague David Phillips take behavioural effects into consideration in their analysis. They say that when calculating what a change might cost or benefit the public coffers, "the best evidence" available is that produced by HMRC, and signed off by the Office for Budget Responsibility, in 2012.
"This suggested that cutting the 50p rate to 45p could reduce revenues by about £3.5bn in 2015-16 if there was no change in behaviour by affected individuals. However, once one allows for behavioural response, their central estimate was a cost of just £100m – a very small amount of money. The best available estimate of what reversing the cut would raise is therefore about £100m too," they write.
They conclude: "There is little additional evidence to suggest a 50p rate would raise more than was estimated by HMRC back in 2012. But great uncertainty remains."
Chris Leslie MP, the shadow chief secretary to the Treasury, raised doubts over the HMRC estimate. "The IFS has repeated its view that there is 'substantial uncertainty' around HMRC's estimates two years ago. As the IFS says, this assessment was done 'at great speed' and with 'partial data' for just the first of the three years when the 50p rate was in place." He added: "We also know that the key assumptions made in this calculation about behavioural effects were decided by ministers, not HMRC. And the costings produced by George Osborne were based on old data. We now know that tax revenues from people earning over £150,000 were nearly £10bn higher over the three years that the 50p rate was in force than expected at the time."
The IFS does offer some support to Balls, however, on his push to reduce inequality. The institute cites its own research into the UK's various income groups and how the recession has affected them. "The group with incomes over £150,000 a year remains extremely well off relative to the majority."
COPY http://www.theguardian.com/uk
The Institute for Fiscal Affairs said restoring the rate would raise "a very small amount of money", or around £100m.
Balls and his Labour allies have argued that a temporary reintroduction of the rate for those earning more than £150,000 would create a fairer tax system at a time of restraint and that it would also help raise revenues to balance the books. Making his argument at the weekend, Balls cited HM Revenue & Customs (HMRC) data saying that people earning more than £150,000 had paid £10bn more in tax than previously thought in the three years the 50p rate was being charged.
However, his claims were disputed by the IFS in a note published on Monday.
The thinktank's analysis will be welcomed by Treasury officials, who have argued that the £10bn extra was not due to the tax rate being set at 50p. They say the new figure came because more people were earning higher salaries in that period than previously thought, so there were more high salaries on which the 45p rate could be levied.
Many of the arguments about what a 50p rate can raise centre around the so-called behavioural response it might prompt. Many business groups, for example, argue it would drive away investment, dampen Britons' entrepreneurial spirit and increase tax avoidance and evasion.
The IFS director, Paul Johnson, and his colleague David Phillips take behavioural effects into consideration in their analysis. They say that when calculating what a change might cost or benefit the public coffers, "the best evidence" available is that produced by HMRC, and signed off by the Office for Budget Responsibility, in 2012.
"This suggested that cutting the 50p rate to 45p could reduce revenues by about £3.5bn in 2015-16 if there was no change in behaviour by affected individuals. However, once one allows for behavioural response, their central estimate was a cost of just £100m – a very small amount of money. The best available estimate of what reversing the cut would raise is therefore about £100m too," they write.
They conclude: "There is little additional evidence to suggest a 50p rate would raise more than was estimated by HMRC back in 2012. But great uncertainty remains."
Chris Leslie MP, the shadow chief secretary to the Treasury, raised doubts over the HMRC estimate. "The IFS has repeated its view that there is 'substantial uncertainty' around HMRC's estimates two years ago. As the IFS says, this assessment was done 'at great speed' and with 'partial data' for just the first of the three years when the 50p rate was in place." He added: "We also know that the key assumptions made in this calculation about behavioural effects were decided by ministers, not HMRC. And the costings produced by George Osborne were based on old data. We now know that tax revenues from people earning over £150,000 were nearly £10bn higher over the three years that the 50p rate was in force than expected at the time."
The IFS does offer some support to Balls, however, on his push to reduce inequality. The institute cites its own research into the UK's various income groups and how the recession has affected them. "The group with incomes over £150,000 a year remains extremely well off relative to the majority."
COPY http://www.theguardian.com/uk
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