Tuesday, 28 May 2013

Tax rate cut

The Treasury is busy spinning the latest income tax receipt figures as proof that it was right to abolish the 50p rate. Last month the new top rate of 45p raised £11.5bn, £1.3bn more than its predecessor. Do lower rates, as the right has long claimed, produce higher revenues?

Not quite.

The spike in tax receipts is most likely due to the income shifted from last year to this year in order to benefit from the lower rate. As the Institute for Fiscal Studies notes: "Receipts in April will have been boosted by high income individuals shifting income such as bonuses and special dividends from 2012–13 to 2013–14 in anticipation of the fall in the top rate of income tax from 50 per cent to 45 per cent".

This, of course, is a trick the rich can only play once, just as, in the opposite direction, they shifted £16bn into the previous tax year when the rate was still 40p. This, of course, was precisely George Osborne's intention. Having falsely claimed that the anomalous first year of the 50p rate proved that it was ineffective, he will now use the anomalous first year of the 45p rate to argue that he was right to scrap it. How much would the 50p rate have raised? We'll never know; George Osborne cancelled the experiment.

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