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:
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.