21 Mar 2012

A budget for the rich?

In the weeks before the budget, the debate focused on one issue. If the government cut the 50p tax rate, as they had threatened, would the budget end up being dismissed as a giveaway for the rich?

In the end, George Osborne did announce an end to the 50p income tax rate, but argued that the budget was in fact tough on the super rich because he would hit them with other taxes.

“Thanks to the other new taxes on the rich I’ve announced today, we’ll be getting five times more money each and every year from the wealthiest in our society,” he told the House of Commons.

“So the richest pay more. The economy benefits. Britain is competitive again.”

His calculation, endorsed by the government’s independent watchdog, the Office for Budget Responsibility (OBR), was that reducing the 50p tax rate to 45p would only cost the exchequer £100m a year, and that other taxes aimed at the super rich would raise five times that.

Those taxes take three forms. There’s an increase on the stamp duty on the sale of houses worth more than £2m, to 7 per cent. £2m houses bought through offshore companies will attract a punitive rate of 15 per cent.

And from 2014-15, he expects to receive £490m from a crackdown on a series of highly abusive tax loopholes which are listed in the budget as “unlimited tax relief”.

These are essentially complex schemes marketed aggressively by small tax firms, which seek to exploit the tax breaks made available to industries such as films to encourage domestic productions.

Add these up, and it turns out George Osborne is being modest. His extra taxes on the rich will raise more than seven times the cost of scrapping the 50p in 2014-15.

Gains from cracking down on evasion are notoriously difficult to realise, but the tax expert Stephen Herring, a partner at BDO, estimates successfully closing “unlimited tax relief” loopholes could easily raise half a billion pounds.

It is the other side of the equation that is more doubtful. “I am surprised about that estimate. It’s radically reduces from the estimate that HMRC made at the time of the autumn statement and last year’s budget. And I want to know a little bit more about it than just being told that the OBR has approved it.”

Robert Chote, the head of the OBR, admitted that the number was “by no means unarguable.”

However, the budget will certainly leave a large number of high earners better off. The increases in stamp duty only apply to a minority of 50p tax rate payers, though it hits them very hard. And the crack down on unlimited tax relief abuse only hits those who take advantage of it, which is also a minority.

It may not be a budget for the rich, but this combination of tax measures will leave a large number of higher earners better off, even if Osborne’s claim is correct that the super-wealthy as a group end up paying more.