Sunday, 26 January 2014

Oh no, not again

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%.


  1. The Davos crowd will love you for this.

  2. Frances,

    I think this is a political masterstroke from Labour as those on high incomes don't vote Labour anyway. They will go into the 2015 election with the clear distinction of being for the many not the few. The Tories, getting hammered on all sides by UKIP, will be seen protesting the rights of the rich whilst still claiming we're all in this together, oh dear.

    Mr Balls clearly doesn't have much of a grasp of economics as his sudden decision to run a surplus shows. Recessions follow government surpluses as night follows day. It is a regression to the Household Fallacy of the very worst kind, again all political because it sounds good.

    The sheer amount of noise created in the MSM suggests protesting the proposed 50p tax rate is defending the indefensible. bill40

    1. I disagree. This plays to the gallery in his own party, but it isn't going to impress the swing voters he desperately needs. They aren't "those on high incomes who don't vote Labour". They are those on low to middle incomes who might vote Labour if it did something for them. The 50p rate is irrelevant to them. Marginal tax rates are not.

    2. I don't think Balls has any intention of running a surplus. Instead he is talking tough because this apparently reassures voters. They like low taxes and the benefits of public spending but are nervous of government deficits and rising debt. He has noticed that Osborne was able to maintain a high deficit while talking tough.

    3. I don't think Osborne has any intention of running a surplus either. It is all electioneering - from both sides.

  3. Frances says “If Labour are so short of policies that they have to borrow from the Tories, they don't deserve to win.”

    That phenomenon (i.e. the political left being so brainless that all it can do is copy the political right) is actually a world-wide phenomenon, as Bill Mitchell has pointed out several times on his “Billyblog” site.

  4. Labour are a random policy generator. Random not in that the policy is selected by roulette but more they read polls do focus groups and then hang a policy on a perceived issue. Sensible or thought through or joined up it is not. Then when their spokespeople appear in media they have some panacea to float. We got this from Rachel Reeves last week on Benefits and more 'Tough' whatevers - note every policy has to be 'Tough'. In govt this led to 1000s of laws most of which have convicted no one.

    Given Labour's tax and spend plans never differ by even the rounding error (and then only a small fraction) their continual howls of morality are perverse. Indeed as a party who warmly endorsed US torture and rendition (not to mention by Libya, Bahrain, Egypt etc) and created the PFI fraud/over spend their [Miliband and his MPs] care for the poor and public finances have no basis in reality. Even their onion in handkerchief tears for the poor and disabled is ridiculously opportune. Who introduced AtoS and A4E and Serco et al to the public sector?

    All I find when I think of the Milibands, Balls, Osborne, Cameron, Brown, Blair et al is how they must discredit the schools that validated them like Oxford or Cambridge.

  5. Well said Frances
    Good to see a sane and independent voice spelling out the real facts so clearly.

  6. Brick says.

    Reintroducing the 50p rate is not pointless it gives tax accountants a lot more work to do and it will most likely win votes. It is seems to me a cynical example of electioneering. If they really wanted to target the rich then they might look a raising capital gains tax and limiting it on inheritances. If they want to help the economy then they could move the tax bands upwards so higher rates start at higher wages. The problem is that taxation has been used for social engineering,and for helping business so that it now leaks like a sieve. There are much better ways to do these things than constantly tweaking tax rates and hiding taxation in obfuscated forms. Since we are in a race to the bottom on corporation tax, due to global imbalances and the matra that free trade is always good what else can we expect.

    Benefits suffer from the same madness as taxation having been tweaked and changed for social engineering purposes to make statistics look good. A universal basic income would tend to reverse that engineering and highlight the real problems. Selective Statistics drive electioneering these days rather than statesmen like bold initiatives.

    Besides think of the unemployement potential from all those individuals who currently have to battle everyday with the complexities of taxation and benefits. Its sort of makes you wonder why the coalition government does not run with it. That people can be retrained will not enter politicians heads of course.

  7. It strikes me he's trying to sound like a Labour Chancellor when really he's not one. He's a Neoliberal like so many of the others but he's trying to hide it. Really if you're anti-Neoliberal in the UK there's no-one to vote for at all.

  8. the The 50 p rate, 2009, was described as temporary anyway

  9. The 50p rate would be an astute political move if it were part of a comprehensive alternative to the current orthodoxy. Unfortunately, like so many Labour policies, it appears to be a purely political move - Balls has form as being as political as Osborne in his policies. Indeed Balls has shown no sign of opposing orthodoxy. Until that happens, he is a dead weight - ensuring that Labour remains mired in the mistakes of the past.

  10. Your point about the 50p tax rate not generating sufficient revenue to form the centrepiece of a deficit reduction strategy is obviously correct- even if we work on the most optimistic scenarios for revenue collection. Though perhaps many of modest income - including most of the population if polling is to be believed - disagree with you and think that higher taxes on very high income earners is actually the moral thing to do. How many of those on 150K plus are real wealth creators as opposed to rent seekers? Not a high proportion I imagine.

    The final paragraph is spot on. The only long term solution to reduce the debt burden involves some form of programme for growth. To work equitably this must include some form of industrial activism and regional policy. It is difficult to see how they wouldn’t involve taking on and ultimately weakening the City. This is a big undertaking and I can't see that Labour has any appetite to change its attitude towards the financial services sector.

    You state in your article that 'Very high marginal tax rates are a serious disincentive not only to work, but even to remain in the country'

    Is there any evidence for this? - If so I would like to see the research.

    And if it is so easy for high income earners to just evade the tax then why do they oppose it so vociferously?

    Some of the most valuable work in the economy such as the research and teaching in the University sector is done by people on much less than 150K per year I have a great deal of doubt about how much damage increases in the top rate of tax would inflict on the economy as a whole. There is also the argument that many of the people on salaries of over a 150K a year work in parts of the casino banking industry which are a more a liability than an asset to the country. With this in mind it is doubtful whether an exodus of some of these to other financial jurisdictions would be a loss as opposed to as benefit. A smaller financial services sector would also mean a more competitive exchange rate which would help exporters.

  11. I'm coming at this from a slightly different direction. I agree with commenters saying that some of the opponents of the 50p rate are protesting too much: we're not talking about going back to the 1960s and 95% super tax, just the early 80s. Is 50% over £150k really a "very high" marginal tax rate? If it is - if political common sense has shifted that far to the liberal Right - I'd tend to support politicians trying to shift it back again.

    Given that it obviously hasn't been costed out properly (and probably can't be), the proposal to reintroduce the 50p rate can't be justified in economic terms, & Balls shouldn't try. That doesn't mean it's necessarily a bad thing, though. Even with Osborne's repeated lowering of the 40p threshold, quite a substantial majority of people don't pay higher-rate tax and never will; the number who are likely to be hit by the 50p rate is minuscule. It's - potentially - good politics, in other words, signalling a return to the genuinely progressive income tax system which was irresponsibly dismantled by Nigel Lawson in the boom years of the 80s (or so it could be argued).

    On the other (third) hand, the argument above is made moot by Balls's bizarre pre-announcement that the rate would be temporary. This not only conceded the political argument before it had been made, but punctured the economic argument, openly inviting all the kind of back-shifting & forward-shifting shenanigans you describe in the post. Overall, it's woeful stuff.

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