50p tax rate may be losing government money
The top rate of income tax may not be raising any revenue for the government and could even be losing it money, a think tank is warning.
With debate raging at Westminster over the 50p rate introduced by the Labour government, the Institute for Fiscal Studies (IFS) says: “In fact, it is not clear whether the 50 per cent rate will raise any revenue at all. There are numerous ways in which people might reduce their taxable incomes in response to higher tax rates; at some point, increasing tax rates starts to cost money instead of raising it.
“The Treasury’s best guess is that the 50 per cent rate will raise some revenue. That is certainly not impossible, but it is certainly uncertain.”
The IFS’s warning is included in a major review of the tax system, led by Nobel laureate economist Sir James Mirrlees.
When you put up people’s tax rates they change their behaviour. Stuart Adam, IFS
Stuart Adam, an IFS senior research economist who contributed to the review, told Channel 4 News: “What is undisputed is that when you put up people’s tax rates they change their behaviour to try and avoid paying tax.”
Last week, 20 leading economists wrote a letter to Chancellor George Osborne saying he should scrap the 50p rate, which is levied on incomes above £150,000.
The Treasury says it will raise £2.7bn a year, but Mr Osborne has asked Revenue and Customs to carry out further analysis. The Conservatives say the top rate is a temporary measure to deal with the budget deficit. Their Liberal Democrat coalition partners are resisting its abolition.
The report says wealthy people could decide to change the way they are paid by contributing more to a pension or charity or converting income into capital gains. Another option is leaving the country or deciding not to move to Britain.
Read more from FactCheck: Why less is more when taxing the super rich
Proposed changes
The review does not make any recommendation on whether the 50p rate should be scrapped, but it proposes several other radical changes to the tax system.
These include the integration of income tax and national insurance and the extension of VAT to nearly all spending, with the money raised used to cut income tax and boost benefits. Another proposal is the abolition of stamp duty and the reform of council tax, with payments based on up-to-date values.
‘Unnecessary costs’
Sir James said the review showed that the system imposed “unnecessary costs” on the economy. “It reduces employment and earnings more than it needs to. It discourages saving and investment, and distorts the form that they take.
“It could raise as much revenue and achieve as much redistribution as it currently does in far less costly ways. There is no getting away from the political difficulty associated with some of the proposed changes. But there is also no getting away from the enduring costs of failure to reform.”