Jeremy Corbyn and Some Maths

It would be nice to think… I’ll start again, for those who would like an effective opposition it would be nice to think that the Times has it wrong and Corbyn can’t possibly be 17% ahead in the Labour Leadership polls.

But just in case it isn’t another witty exercise by YouGov in trolling the Labour Party I thought I’d take a short look at one of Corbyn’s few concrete pronouncements about tax. Because, as Jim Pickard of the Financial Times has observed, he isn’t exactly inviting scrutiny of his economic policy:

Speaking on Sunday Politics earlier this week – and you can watch it here from 18.13. He said this:

I would bring back the 50 pence rate. It does bring in more money. It would help to deal with some of the problems with spending.

When asked by Andrew Neil how much it would bring in he replied:

About £5bn.

A figure that came from:

Some research I’ve had done for me by some very clever people.

But on the data available today that figure is mathematically impossible.

Back in 2014 the IFS looked at what raising the rate from 45p to 50p would yield and arrived at – on the back of some HM Treasury research signed off by the Office for Budget Responsibility – a figure of £100m.*

This figure was arrived at by a two stage process. First, how much income is earned above £150,000; and what is 5% (i.e. the tax increase) of that income? Call that the theoretical yield. Second, calculate the effects of people changing their behaviour in consequence of the tax rate going up 5%. People will retire early, emigrate, engage in tax avoidance or evasion, work less hard and so on. Call these the behavioural effects. And in the case of a tax rise, they reduce the theoretical yield.

It’s important to note that calculating the behavioural effects is difficult – and (as each of the IFS, HM Treasury and the OBR recognise) there are reasonable grounds upon which one might disagree with an analysis of those effects.

But Corbyn’s advisors’ £5bn exceeds even the theoretical yield from raising the rate. On HMRC’s figures, it is mathematically impossible.

The theoretical yield is relatively straightforward to calculate.

HMRC produces statistics which show income tax liabilities by tax band. They can be seen here and the key table is 2.6 for 2015-16. What it shows is that the aggregate income tax paid on income earned above £150,000 per annum was £31.989bn. That’s the sum of the Additional Rate yield from Earnings, Savings and Dividends.

The Additional Rate taxes at 45% all income earned in a tax year over £150,000. One ninth of £31.989bn (£3.554bn) represents what the Additional Rate (at 45%) collects compared with the Higher Rate (40%) (5% being one ninth of 45%). Putting it another way, that £3.554bn is what the extra 5% yields. Corbyn has suggested raising the Additional Rate by another 5% (from 45% to 50%) which would, ignoring any behavioural effects, yield a further £3.554bn. That’s the theoretical yield – and it’s substantially below £5bn.

There’s plenty of room to argue about how profound the behavioural effects would be of increasing income tax rates from 45-50%. No one argues that there would be no behavioural effects. But even if you make the heroic assumption in Corbyn’s advisers’ favour that there are none, on HMRC’s figures he still doesn’t get to £5bn

*Just for the record I should say that I don’t remotely agree with The IFS that that figure represented Labour’s Manifesto pledge yield. But that’s for another day.

17 thoughts on “Jeremy Corbyn and Some Maths

  1. Well, to be generous, if £3.5 billion is the right answer, then £5 billion is a substantially better estimate than £100 million (about 40% too much, rather than 97% too little). Within an order of magnitude (factor of ten), certainly.

    It is hard to estimate behavioural effects, but I would be surprised if the actual yield came to more than £1 or 2 billion. Which is a large number, to be sure, but a drop in the ocean compared to the £500 billion plus annual tax take (or indeed the £160 billion plus annual income tax take).

  2. I don’t say £3.5bn is the right answer. I say it’s the answer pre-behavioural effects.

  3. Indeed you did. Again, being generous, perhaps Jeremy alighted on the theoretical number.

    Even if the post-behavioural number is £1 billion, he was within a factor of 5, when the official estimate of £100 million is out by a factor of ten.

  4. For a whole host of reasons it is not for me to enter into which of the four candidates might be the best person for the job but I do not think that the behavioural responses of the return of a 50% additional tax rate should be underestimated. By way of example, a very profitable SME will, very understandably, take account of the incidence of income tax (and national insurance for bonuses) of paying a bonus or dividend to its director-shareholders. To the extent that a dividend is reduced (or not increased if you prefer), there would be a loss of dividend tax at the proposed rate of 38.1%. In other words, at the margin (and admittedly very simplistically), if only 1 in 7 were to reduce a dividend payment, there would be no extra income tax collected. Clearly, this analysis is not relevant to those holding listed company shares with the exception of the forestalling impact in the years around an introduction of a 50% income tax rate.

  5. I’m also worried about another of Corbyn’s comments, on £93bn subsidies to corporates, which he wants to have a go at –
    It’s clearly based on an article in the Guardian, in turn resting on work by a senior lecturer in social policy at the University of York, Kevin Farnsworth –
    Unfortunately, both the logic and the maths are doubtful.
    1. Part of the figure is the £20bn ‘subsidy’ given to capital spending. What this seems to assume is that, absent a Government ‘subsidy’, profits would be higher and that they would be taxed at 100%. It ignores the fact that all accounting systems make allowances for capital spending as part of the cost of doing business. To deem it a subsidy is like describing tax relief for wages a subsidy. And it also assumes that the “lost” profits will be taxed at 100%. Neither proposition seems a serious piece of analysis.
    2. Another element is £8.5bn to airlines over VAT free fuel. This assumes that passengers get no benefit from this in the way of lower prices, and that if charged the airlines would absorb the cost without increasing prices. I think passengers do benefit in the way of lower fares (ignoring any Green considerations) and that they would pay more if VAT was charged.
    3. Another £15bn is procurement, e.g. “Capita, Atos, G4S and Serco alone received £4bn worth of public-sector contracts in 2012-13. While procurement provides the public with services, it is not always about securing value for money for taxpayers”. The article presents as fact a claim by Farnsworth of “direct above-cost element of procurement at £15bn out of a total spend of £238bn”. His paper argues that this is based on an average profit rate of 6.5% on the total spend. We just do not know what an alternative price might have been had the contracts not been made, or what degree of notional profit a public service provider might have to build in.

    Government spending and the recipients are clearly very important areas of study. But I doubt it’s a good place to start from to base your work on a dichotomy of public good, private bad, and certainly not to assume that deducting capital spending from taxable profits is a subsidy.

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