Oh no, not again: Ed Balls’ 50p tax rate

By Frances Coppola

At the Fabian conference yesterday, Ed Balls announced the Labour Party’s intention, if elected in 2015, of restoring the 50p tax rate that was abolished by the present Coalition government. It is the central plank of his deficit reduction plan. But it is by no means clear that it is capable of bearing the weight he would like to place upon it.

The 50p rate had a short and inglorious life. It was announced by the previous Labour government in the 2009 Budget and took effect in April 2010, only a month before Labour’s defeat in the May 2010 election. The Conservatives announced the reduction of the rate to 45p in the 2012 Budget, to take effect in April 2013.

Both the OBR and HMRC have shown that there was a substantial behavioural response (“forestalling”) to the announcement of the 50p rate, with HMRC estimating that £16-£18bn of income was brought forward into the 2009/10 tax year to avoid the 50p rate. The announcement of the 45p rate elicited a similar behavioural response: final figures for “reverse forestalling” (delaying income receipts in order to take advantage of the tax cut) are not yet available, but ONS estimates that deliberate delays caused bonus payments to increase by 4% in April 2013. Consequently it is actually impossible to know what tax revenue the 50p rate would have raised. It has become a political football, with Labour insisting that it would have raised more tax if it had remained long enough for forestalling effects to unwind, while Conservatives point to increased tax revenues in Q2 2013 as evidence that the 50p rate was counterproductive and the new 45p rate raises more. Both are arguing from at best thin and at worst non-existent evidence.

The simple fact is that we do not know, and can never know, what the 50p rate would have raised. HMRC did their best to create counterfactuals, and tested them with an impressive amount of Monte Carlo simulation. Although the Monte Carlo results suggest the counterfactuals are far from robust, HMRC’s conclusion is that the 50p rate wouldn’t have raised much if anything, and could even have lost them money (my emphasis):

“Although there is uncertainty around these estimates, sensitivity testing demonstrates that is difficult to construct a plausible outcome consistent with a yield estimate as high as those original forecasts. The conclusion that can be drawn from the Self Assessment data is therefore that the underlying yield from the additional rate is much lower than originally forecast (yielding around £1 billion or less), and that it is quite possible that it could be negative.”

I suppose it could be argued that this report is hardly neutral, produced as it was by HMRC in March 2012 under the governance of a government intent on abolishing the 50p rate for political reasons. But the same cannot be said of the IFS, which also warned that expectations of high revenue from the 50p rate were likely to be disappointed.

The Labour Party are arguing that as tax revenues actually rose by £9.5bn during the period of the 50p rate, it is worth reintroducing it. But they have the same counterfactual problem as HMRC. We do not know whether tax revenues would also have risen with a lower tax rate. Nor do we know whether they would do so in the future, either. Hanging a deficit reduction strategy on something so horribly uncertain looks unwise, to say the least. But is this really about the deficit?

When the 45p rate was introduced, I criticised Osborne for using it as an electioneering strategy. Now, it seems, Ed Balls is doing the same. He has thrown down the gauntlet on an issue where economics has no answers and the decision must be made on political grounds. Deficit reduction be hanged. This is about the Labour party getting its ball back.

And that, frankly, is a tragedy. We do need to have a discussion not just about the economics of high rates of taxation, but about their morality. Piketty and Saez are suggesting a return to 1970s-level tax rates for the very rich. But where is the evidence that these are an effective redistributive mechanism? Very high marginal tax rates are a serious disincentive not only to work, but even to remain in the country. And international cooperation can’t be relied on to ensure that the very rich cannot avoid tax by moving around. There will always be a little island somewhere in the world that will seize the opportunity to build its GDP by cutting tax rates for the very rich.

Nor are high tax rates a problem only for the very rich. Benefits withdrawal creates very high tax rates for certain groups. In the UK, people on just over £100k have higher tax rates than those on £150k, due to withdrawal of the personal allowance. People with children face increased marginal tax rates due to withdrawal of child benefit when one adult in the household earns over £60,000. And people on very low incomes can have even higher marginal tax rates when they start paid work, over 90% in some cases. Universal Credit is supposed to reduce this to 65%*, though even that is a shockingly high rate for people on low incomes. But at least the Coalition government is attempting to bring down the tax burden on the poor. I see no such attempt from Labour.

Why isn’t Labour addressing the immorality of means-tested benefits? Why are they focusing only on a small tax increase for the very rich, and not eliminating the unfair and inconsistent tax and benefits rules that result in such very high marginal tax rates?

I find myself – utterly bizarrely – more in agreement with the Adam Smith Institute over tax and benefits than with any mainstream political party. Introduce a universal basic income and do away with this plethora of expensive and inconsistent tax reliefs and benefits. And stop taking from the poor with one hand and giving it back with the other. Labour’s talk of enforcing a “living wage” simply distracts attention from the fact that the tax system takes from people the money they need to live on, then gives it back grudgingly in the form of means-tested benefits. Now we don’t want to pay the benefits, but we still want the taxes – so it seems the solution is to force businesses to pay higher wages. Higher wages may indeed be a good thing, but not for this reason: if enforcing the “living wage” means workers receive less in benefits, it will benefit workers not at all, since the increase will go straight to government. And as I suspect that enforcing a “living wage” would raise unemployment, I’m not even convinced it would reduce the deficit.

Reintroducing the 50p rate is probably pointless. And the deficit reduction programme is unlikely to work, because it hangs on “austerity-lite” without any clear policies to stimulate growth. How many times do I have to remind politicians that austerity measures in a stagnant economy do not reduce the deficit? This is pale blue politics. Does Ed Balls really think watered-down Conservative policies will win the election? I sincerely hope they don’t. If Labour are so short of policies that they have to borrow from the Tories, they don’t deserve to win.

If Labour really want to win, they have to be much more radical than this.

* Seems Universal Credit’s marginal tax rates can be far higher than the advertised 65%. The BBC’s Paul Lewis has crunched the numbers and come up with a top figure of 83% for some people and many households at 81%.

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