21 Mar 2012

Budget 2012: tax avoidance and the 50p rate

No wonder George Osborne announced some crackdowns in tax avoidance.

Here’s an amazing fact. Apart from the leap in the personal tax allowance, what was the largest annual tax cut today? Expected tax avoidance this year.

In fact you may have missed the mini fiscal stimulus at the heart of this Budget. There will be a £3bn fiscal loosening over the next year, followed by a £3bn tightening in the following years. What may be surprising is that this is almost entirely caused by £2.4bn of tax avoidance from Britain’s rich this year, that is then unwound in later years. Yes, this is the OBR’s expectation in this financial year that the rich will not pay out £6.5bn of dividends and bonuses in this tax year, but shift it into April 2013 when it attracts the 45p tax rate. Perfectly legal.

This follows on from that truly amazing staistic that I revealed on Channel 4 News on Monday. The Chancellor confirmed in his speech that Britain’s rich moved a staggering £16bn of dividends and bonuses. The HMRC report says £16-£18bn. My report on Monday put this “forestalling” at £18-20bn.

So the fact remains that the decision on the 50p rate was made on the basis of one year’s highly distorted data. Now the chancellor’s take on this was that avoidance at this level shows that the tax didn’t work. But what he didn’t say was that the forestalling effect was a one-off. The HMRC report does try to strip out the impact of forestalling and analyse other “behavioural impacts”.

The OBR’s best estimate is that the behavioural impacts, such as retiring early and emigrating, etc, are far bigger than the Labour Treasury had assumed. That is key to understanding why the cut from 50p to 45p is scored at such a small giveaway to the rich.

There is a mountain of uncertainty about that. OBR boss Robert Chote himself told me the following when I pressed him about it:

“If the government decides it’s going to cut this tax rate, then we have to make a choice – we have to make an assumption about how people are going to respond to this .. and the implications for our own forecasts.

This is a judgement based on not even a full year’s data based in terms of how people have responded to the 50p rate, in particular in terms of those self assessment tax-payers.

The costing of these sorts of changes is by no means unarguable… you have to disentangle colossal forestalling. Then you have to work out the long standing impacts.”

None of this uncertainty suggests it is right or wrong to cut the 50p. It’s just almost impossible to discern from the existing data. It might have been that this year’s data, a full, far less distorted year of 50p might have yielded considerably more tax. It was in a way strangled at birth.

Actually it really was nobbled from the start by the fact that it was pre-announced by Labour with a year to forestall income. In some ways it was set up to fail. Many economists will argue that it was always going to. We’ll never know.

11 reader comments

  1. Andrew Dundas says:

    Fading away the personal tax allowances is over-due. As a pensioner myself (and a bit of a leftie) I have to admit that the Age Allowance causes nothing but problems and is of dubious worth. Income above £22,900 and up to c£28k is effectively taxed at 30% because of the clawback of the allowance. Most pensioners find that too complicated to figure out. Especially because the tax on our State pensions is not subject to normal PAYE rules, but added onto our other incomes.
    Moreover, we pensioners pay neither employee’s nor employer’s NIC that for most earners amounts to nearly half what they pay directly to government. Why shouldn’t pensioners pay something towards social & health care – after all we use a great deal of it!
    A long-term solution would make NI pensions tax-exempt (because our contributions were paid out of our taxed incomes) and a supplementary tax added for the social benefits we receive.
    Only inhibition is that pensioners are the most reliable voters, and politicos are loath to offend us.

  2. e says:

    Thank goodness, the bleating of the rich comes to an end; there can be no more winging about the 50p tax rate. I’m grateful for this.

    Our government has bet on lower taxes for ‘entrepreneurs’, further privatisation of State Assets, and the marketisation of health and welfare creating jobs and growth. Can we depend on our media holding them to account for this? Will the government’s commitment to jobs be challenged again and again until unemployment falls to something like 3% [as near as it gets to full employment]. Or will it just watch as another generation becomes economic fodder and then another after that…..

  3. Saltaire Sam says:

    The tax dodgers will now delay paying themselves their next hard earned billions til the 50p rate is gone, reinforcing George’s view that the tax didn’t work.

    But it is a trick you can only pull off at the start and end of the tax. If he’d left it in place, they couldn’t forestall twice.

    When you hear Osborne talking about an extra £5pw on pensions as a ‘very big’ rise, you realise just how out of touch he is. George, it would take several months of that extra for me to be able to celebrate with one bottle of the wine that no doubt graces your cellar.

  4. Philip Edwards says:


    Nice one. Thank you for this.

    But beware…the establishment don’t like a smart ass telling the truth.

    So expect a job offer any day – maybe as economics adviser or “something in banking.”

    If you insist on telling the economic truth (which I hope you do) then you can assume you’ll end up on a black list somewhere.

    And don’t think I’m kidding. Jon Snow was designated “a pinko” by that reactionary old fascist Bernard Ingham when he told the truth. Also, recently the Guardian exposed such a black list in the construction industry. I’m sure too you know of past activities of the loony Economics League.

    But keep at it, smart ass :-)

    One way or another, the truth always hurts.

  5. Philip says:

    Faisal. I hope you will be able to keep some track of the claim that Osoborne’s other measures, including the Stamp Duty on £2m houses + the tax avoidance measures actually raise “five times as much” as the revenue which would have been lost in an unforestalled full year of the 50% income tax higher rate. My scepticism equals my irritation at the misleading statements made about the revenue yield of the 50% rate, with even people who should know better, like Cable, joining in the PR. The reason why so many people turn off politics is because of this twisting of the truth.

  6. Charles Jurcich says:

    Surely the data for 2011/12 could still be analysed to see if the coallition were correct – maybe there was a spike in revenue from the 50p tax during this period.

    HMRC would probably work this out anyway – but it might not be published.

  7. Caliban says:

    All this “soak the rich” talk is painfully naive.

    Even at 40% our top rate of tax is higher than Germany, France, and many other leading developed economies.

    High taxes have VERY undesirable long term consequences for the economy. They cause stagnation and low employment. We have seen it ourselves with Labour in the 60’s. And France and Germany seem to have got the message.

    Of course, the Lefties are so concerned with “Social Justice” they will happily see middle and lower income families living in penury provided the wealthy are being punished for doing so well.

    The USSR was the ultimate expression of this principle, but a watered down version of it still motivates the gullible.

  8. Hoaxster says:

    And nobody wants that, right?

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