It seems the 50p tax rate is paying us dividends

Once again rightwing scaremongering that the Treasury would lose money has been proved wrong


o Duncan Weldon
o guardian.co.uk, Tuesday 22 February 2011 17.00 GMT


The latest public sector borrowing figures have revealed an unexpectedly large surplus for January 2011. The Treasury repaid £3.7bn last month, surpassing expectations and representing the strongest month since July 2008 for the public finances.

But what drove the numbers? To the horror of the Tory right and proponents of trickle-down economics there is some evidence that it could be the impact of the 50p tax rate on earnings above £150,000.

The data shows that income tax receipts in January came in at £2.38bn – up by 17.8% on the year before. However receipts from national insurance contributions (NICs), which one would expect to move with income tax, rose by only 4.2% over the same period.

Last week's labour market statistics showed that there had been no improvement in the overall labour market with the percentage of people aged 16 to 64 in work being static at 70.5% between December 2009 and December 2010. The same report said that average weekly earnings had grown by only 1.1% over the past year.

So we have a mystery – the number of people in work is fairly constant, earnings have only increased by 1.1% and NICs are only up by 4.4% and yet income tax revenues are up by nearly 18%.

The most likely explanation is that higher income tax receipts partially represent the new 50p rate kicking in and rasing revenue. How else to explain the figures? Receipts are up way in advance of earnings or employment growth.

For nearly two years rightwingers have been decrying the 50p rate and claiming that it will actually lose the Treasury money. They cling to the infamous Laffer curve which suggests that raising taxes beyond a certain point will lead to revenues falling. While it is no doubt true that governments can reach a point whereby increasing tax revenues becomes self defeating, there is no evidence that this is the case in the UK. Academic research suggests that in the OECD only Sweden has reached that point.

Of course we've been here before, any tax increase on the wealthy will always been greeted by claims that it is counterproductive. When Alistair Darling introduced a tax on bank bonuses, it was claimed that the result would be a mass exodus from the City of London "potentially costing the Exchequer £1.2bn". It actually raised £2.3bn.

It looks the right may have been scaremongering again over the 50p rate.

It seems the 50p tax rate is paying us dividends | Duncan Weldon | Comment is free | guardian.co.uk

Laffer curve works but at very different levels indeed. The only time it actually tend to work regardless of initial level is with corporate taxes...

Cies can and easily do locate their profits nearly wherever it suits them... See the point made by UK Uncut in that regard.

The only thing I would be potentially worried with that tax is that 1- it's too flat. There is a massive difference between someone earning £150k and £150millions. Let alone £1.5 billions. And 2- What happens to the re-investment rate of small cies? Usually, small cie owners are quite keen on plowing back their profits (and small cies are the drivers of job growth, not big groups) - But that's only after their lifestyle expenses have been covered.

Hence, in the case of increased taxes, I suspect that small business owners still go and change their car to the latest Mercedes or BMW as they do every year. But they'll reduce their investments... and thus, in aggregate, it may well lead to a drop in GDP and jobs growth...

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Originally Posted by Gilles de Rais

Laffer curve works but at very different levels indeed. The only time it actually tend to work regardless of initial level is with corporate taxes...

I've read articles to the contrary but can't find them now.

Quote:

Cies can and easily do locate their profits nearly wherever it suits them... See the point made by UK Uncut in that regard.

But nevertheless, the dire warnings of a max exodus of business becuase of the 50p rate, just like the introduction of the minimum wage, simply haven't happened.

Quote:

The only thing I would be potentially worried with that tax is that 1- it's too flat. There is a massive difference between someone earning £150k and £150millions.

Well of course that's true, but it was before the 50p rate as well. Our tax spread runs from below minimum wage to high professional and then stops.

Quote:

Hence, in the case of increased taxes, I suspect that small business owners still go and change their car to the latest Mercedes or BMW as they do every year. But they'll reduce their investments... and thus, in aggregate, it may well lead to a drop in GDP and jobs growth...

But neither an increase in GDP or jobs growth are necessarily of benefit to anyone else. Creating a job that pays so little that the workers still have to be topped up by benefits, as many currently are, would actually increase the public cost.

Again, dire predictions were made that the minimum wage would sluaghter jobs, but nothing of the sort occurred. So there is room for a balance here.