Oops. I can’t believe he did it again.

In a speech this morning from the new Shadow Chancellor which was rather longer on rhetoric than concrete policy, one measure stood out.

True, it stood out was because it was the only concrete policy announced. But it also stood out for its wrongheadedness.

McDonnell called for this:


But in the Summer Budget, the Conservatives had already promised to introduce exactly this measure:


What certainly is different is the proposed yield. The Conservatives predicted a steady state yield from their proposals of about £170m per annum.


John McDonnell seems to be promising a yield of up to a staggering 7,600% of this. Indeed, as David Pegg of the Guardian has pointed out, the expenses claimed (in 2012/13) by individuals for property repairs, maintenance and renewals was just over £3bn – and the value of the ‘tax breaks’ on those expenses is a maximum of 50% (the then top rate of income tax) of that, or £1.5bn. On any view £13bn is fantasy forecasting.

The list of Labour’s tax bloopers since the General Election defeat is already a long one.

The mathematically impossible £5bn of yield from a 50% rate; the promised £120bn receipts from tackling tax evasion and avoidance (now downgraded, according to McDonnell on Today, to an equally illusory £20-25bn); £93bn of savings from tackling corporate welfare (now downgraded to unspecified “cuts“); and the shambles around Labour’s position on cutting the rate of corporation tax (where, in a single day, McDonnell called on Question Time for the Tories’ cuts to be reversed whilst in Parliament, Labour supported them).

But even with such worthy competition, this measure really stands out.


Michael in the comments section following has pointed out that McDonnell can be read as promising savings of less than £13bn. In other words, that he’s again (c.f. the £120bn tax gap and £93bn corporate welfare) performing a kind of fiscal dance of the seven veils – tempting his audience with the suggestion of a yield greater than that he knows is possible. This reading would not, however, explain why McDonnell mentions the £13bn figure if what he means is something closer to HM Treasury’s £170m estimate, or how £13bn hugely overestimates the scale of possible savings given the cost of the relief.

De-celerated Payment Notices

Earlier this week, HMRC issued a Press Release trumpeting its performance under the Accelerated Payment Notices regime introduced by the Finance Act 2014.


What APNs do is enable HMRC to require taxpayers who have engaged in certain types of behaviour – behaviour that has hallmarks of ‘bad’ tax avoidance – to cough up the tax they say they’ve saved by that behaviour whilst the courts decide whether they’ve actually saved it. From a tax collection perspective, they’re rather a good thing – for reasons I set out here – and were a key part of the radical panoply of measures introduced by the Coalition to tackle tax avoidance.

From a tax collection perspective. But nothing’s ever quite as it seems.

Because another great advantage of APNs was a political one. They brought forward taxes that Government thought it was going to receive anyway. But the wacky way in which Government accounting works meant that the receipts from them could be treated as new income. The best way to think of APN receipts is like the one-off cash flow boost a business gets by factoring its receivables for the first time. Nothing wrong with a cash flow boost – but Government accounting means that one-off boost is treated like ongoing income and can be used to support additional year-on-year spending, or help spin a narrative that Government was reducing the deficit, or enable Government to pretend to have been tougher on public spending than it really has been. Remarkably, in Government accounting terms you can get a P&L boost just by fiddling around with items on your balance sheet. I wrote about this trick here and here (forgive the title of that latter piece – I got a bit over-excited before the last General Election). And we’re talking about big numbers: this, and the other iterations of this trick, added up to over £10bn per annum.

Anyway. Back to the Press Release. It’s a marvellous round number, £1bn. But how does it compare with what Government predicted it would collect? The forecast revenues can be seen here (at page 22), here (at page 57) and here (at page 33). We’re a a little over 5 months through the tax year 2015-16 and so we should have received all the revenues from 2014-15 (£425m) plus 5/12ths of those from 2015-16 (£2,102m x 5/12) or £1,300m – 30% more than the £1bn actually received. Put a mute on that trumpet, HMRC.

More worryingly still, from Government’s perspective, is that this money is only contingent and – as I pointed out in a piece called ‘Our Big Tax Gamble’ here – there’s a decent chance that the contingency will come home to roost and Government will have to give it all back. When I wrote ‘Our Big Tax Gamble’, the possibility was a theoretical contingency. But it’s a little more than that now: the Supreme Court has just said it will hear substantive arguments in the biggest case of them all: the so-called Eclipse Film Partners case. It wouldn’t do that unless it was interested in those arguments.

If the Government loses in Eclipse it won’t just have to give back some of that £1bn – it will also have to relinquish future anticipated tax receipts of a multiple of that sum.

[Note: I am lead Counsel in Eclipse].

[Note: I am grateful to @strongerinnos and iamconsistent (see comments below) for pointing out what I shall – to save my blushes – describe as ‘improvements’ to my maths.]

Fiscal black socks

As I learnt last night on twitter, Jeremy Corbyn has an appeal that stretches across the political spectrum. He appeals to many on the left as a leader of the Labour Party because so few leaders before him have been ready to speak the truth without fear of the consequences. And he appeals to many Conservatives as a leader of the Labour Party for the very same reason.

Now, if Corbyn is to kick off of the clogs of convention across all areas of policy what will he reveal in mine? Of this there should be little doubt: the black socks of a wealth tax.


Wealth taxes have a powerful appeal to tax reformers on both the right and left. Income taxes place all of the burden on productive strivers and privilege those who hold fallow wealth. They moderate income inequality but leave untouched disparities in wealth. They permit inequalities to ossify over generations. Wealth taxes offer solutions.

The problem with wealth taxes is that they are really difficult to execute. Labour’s election manifesto in 1974 provided

REDISTRIBUTE INCOME AND WEALTH. We shall introduce an annual Wealth Tax on the rich; bring in a new tax on major transfers of personal wealth; heavily tax speculation in property – including a new tax on property companies; and seek to eliminate tax dodging across the whole field.

(I enjoyed that last bit: the same pledge could be found in the 2015 Manifestos of all the major political parties). But as Denis Healey noted in his memoirs

Another lesson was that you should never commit yourself in Opposition to new taxes unless you have a very good idea how they will operate in practice. We had committed ourselves to a Wealth Tax: but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle.

But let’s not focus on the problems. To do so would be to misjudge the mood. Today at least. Let me instead focus on the prize: if it is worth having we might then turn then to ask whether the problems are worth tackling.

We are not blessed with high quality wealth data in the UK but this may not matter for present purposes.

Data in the World Wealth Report 2015 produced by Capgemini and RBC suggests there are 550,000 individuals in the UK with wealth of above $1m owning an aggregate of $2 trillion – or about £1.3 trillion. According to the ONS, aggregate net UK household financial wealth in 2010/12 was (coincidentally also) about £1.3 trillion. But this figure excludes non-financial assets such as houses. Update it and include all household wealth and you instead have a figure of £9 trillion.

Which of these – or other – data sets you focus on rather depends on what you are trying to accomplish. But what interests me is how you might raise a meaningful amount of money from wealth taxes – and in a way that is politically palatable or even attractive to the electorate. This looks to me like a cut in income taxes funded by an increase in wealth taxes.

For these purposes, the Capgemini number works as well as any.

If you charged a 2.5% annual charge on aggregate wealth of £1.3tn your theoretical yield is £32.5bn per annum. That’s a little more than what you’d need to fund a top rate of income tax of 30% kicking in at the present higher rate threshold (my calculations from table 2.5 (2015-16) here). A charge of 5% would fund a top rate of income tax of 20% with a surplus of around £5bn –  enough to mitigate the effects of many of the Conservatives’ welfare cuts in this term.

How might the electorate like those socks?

Laffer Curve: an elegant, useless idea

We talk a lot about taxing the rich – and perhaps we should. The rich become rich by operating in a system that the state enables. And the contention that taxation amounts to a deprivation of their money

is internally inconsistent. The rules of the game at which the rich win include a price to play. I cannot opt to abide by the rules that benefit me – but not the rules that don’t. No one forces me to accept the offer of my neighbour on the left to give him half the plums I collect from his tree. But if I do the half he gets were never my plums.

But this ineluctable logic can’t be pushed too far. Not if my neighbour on the right also has a plum tree – and he’ll let me keep 60% of the plums I harvest. Not if I decide that if I only get to keep half it’s not worth collecting the plums at all. And not if I took the view that, if I vault the fence in the dead of night, I might get to keep all the plums.

These ideas – and others – are all expressed in a relationship we call the Laffer Curve. We call it that wrongly, and uselessly too. Wrongly, because there is no one Laffer Curve. And uselessly, because no one knows what it looks like.

Here’s a Laffer Curve for income tax.


What it shows is (1) that if you have a tax rate of zero, you don’t yield anything. Few would argue with that. And (2) if you have a tax rate of 100% you also don’t yield anything because no one works and so no one pays tax. That’s slightly more tendentious: there’s always someone who so loves his job that he would carry on even if everything he earned went to the state. But let’s press on with the argument – leave Tax QCs to one side for the moment – and assume that at tax rates of 100% no one would work.

The logical consequence of these two propositions is that there is a rate more than 0% and less than 100% at which the tax yield is the highest – what we call the ‘revenue maximising’ point. Set tax rates too low and Government relinquishes more plums than it must. Set it too high and your taxpayers may defect to your neighbour, not bother at all, or be heavily incentivised to find ways to dodge your plum tax.

This is a basic – but incredibly important – insight.

It explains why there is a point beyond which raising taxes is counter-productive (in revenue raising terms anyway) for Government. It explains why, if the aggregate earnings of everyone in the country is 100 taxing them at 20% might raise 19 but taxing them at 80% won’t raise 76. It explains how Ed Miliband’s Labour could argue that cutting income tax from 50% to 45% was a £3 billion tax cut for the wealthiest; the Coalition could respond that it would only cost £100m; and (on the best available evidence) they could both be right.

It’s also a useless insight. Of course, if your neighbour could work at what this rate was he could maximise the amount of plums he got to keep.

But he can’t. Tax theoreticians on the right argue a Laffer curve looks like this.


They argue that high tax rates disincentivise work, stimulate emigration and generate tax avoidance. And they’re right. They also argue that tax rates reduce economic growth – reducing the number of plums on the tree (loosely speaking). And they argue that the consequence is that the yield maximising rate is a low one.

Those on the left argue for one that looks like this.


They agree high tax rates can disincentivise work, cause emigration and tax avoidance. But they argue these effects are overstated and that higher tax rates need not stunt growth. You can push tax rates much higher, they say. And they argue that those who can afford to pay more tax should do.

But this debate rarely rises above assertion and counter-assertion. Because what we know about the shape of the curve is precisely nothing.

We know that today, with our top rate of tax at 45% on income above £150,000, the 332,000 who earn above £150,000 will pay about £49.1bn in income tax in 2015-16 (Table 2.5 (2015-16)). But we don’t know what the world would have looked like today if, for example, Government hadn’t decided to raise our top rate from 40% in 2010-11.

Would there be more (or even fewer) than 332,000 people with income of above £150,000 paying income tax in the UK? Would they be earning more or less in aggregate that they do now? Would they have engaged in more or less tax avoidance? Has a 45% rate had a negative impact on economic growth – or more accurately earnings growth – or more accurately still earnings growth amongst very high earners? What are the effects of that increase on those earning below £150,000? We can speculate on any one of these effects. But unless we can speculate accurately about all of them – and we can’t – we can’t answer the question whether Government receives more in income tax now than had it stuck with a 40% rate.

We can’t construct a sensible counter-factual for the world as it might have been. And nor can we construct a sensible counterfactual for the world as it might be if we were to change rates tomorrow. But from the discourse on the left and right you’d be forgiven for thinking we could.

Here the left’s spokesman du jour Jeremy Corbyn:

Fair taxes for all – let the broadest shoulders bear the biggest burden to balance the books.

He might be right that the broadest shoulders should bear the biggest burden (and in a sense they already do: the highest earning 5,000 taxpayers pay a total of £9.43bn in income tax, or more than 5.5% of all income tax receipts). But it’s a non-sequitur to assert that raising taxes will balance the books, indeed if you tip into the downward slope of the curve you’ll further unbalance them.

And it bedevils much thinking on the right too – here’s Nigel Lawson talking of cutting the top rate to 40%:

I would strongly support this: It would significantly enhance the attractiveness of the UK as a place to do business, at no cost in terms of lost revenue.

That was the experience when I brought the top rate down to 40 per cent in 1988 and it is even more relevant today.

The (let us assume) fact that cutting the tax rate from 60% to 40% was revenue neutral absolutely does not have as its consequence that further tax cuts would be revenue neutral too. (You can test this hypothesis by looking on any Laffer Curve of the effects on yield of cutting tax rates from 20% to 0%).

The IFS’ pre-election estimate of the exchequer effects of raising the top rate from 45% to 50% doesn’t quite fall into this trap:


But it’s important to recognise that HMRC’s estimate from March 2012 (a document that still makes – if you’re of a certain mindset, anyway – for interesting reading) will be of very modest value now. The shape of the curve is affected by a variety of externalities that change over time. The marked success of the Coalition in tackling tax avoidance will reduce what I’ve referred to as dead-of-night fence-vaulting. Put shortly, it will have shifted the revenue maximising point to the right. So too, and markedly, will restrictions in pension tax relief for high earners. But the Coalition also adopted other tax measures which will have shifted the point to the left. And that’s before we move on to effects external to the UK.

I stress these points because they’re what I find most interesting. The political potency of the inequality narrative won’t diminish any time soon. And so the question whether to change income tax rates will continue to find its answer in political rather than fiscal considerations. Nigel Lawson knows this, of course. As (one imagines) do Corbyn’s advisers. Both are embarked on what virtue signalling looks to their respective supporter bases. But it’s no more than assertion: stay sentient folks.

But, as I sought to stress back when I was involved in Labour’s tax policy making, alongside the virtue signalling it’s worth considering how to maximise the yield from changing tax rates. This is a truth that applies to both upward and downward rate change – but I don’t get much sense that many policy makers think like this. Although we can’t know what a Laffer Curve looks like we can still seek to shape it in advance of rate changes. And that’s as universal a truth as you’re likely to find in tax rate policy.

Jeremy Corbyn and Pensioners

Writing in Tuesday’s Telegraph, Jeremy Corbyn said that nearly two million pensioners live in poverty. He called for an increase in the single tier state pension to the minimum income standard figure of £182.16 per week from £144 per week. This step, Corbyn said, would cost £22bn.

Do these claims stack up? Is this the right policy?

The article comprising the supposed source of the “nearly two million” claim (entitled, somewhat unhelpfully for Corbyn: ‘Pensioner poverty at an all time low – but the young lose out‘) contains no such figure. It does, however, give this chart


which (as the headline suggests) shows that pensioners as a demographic group are privileged: they have poverty rates of just above a half of the population as a whole. Indeed, as research released by the JRF on Tuesday revealed:

Median pensioner income (after housing costs) is now actually above that of the non-pensioner population

But what of the “nearly two million” claim?

Corbyn’s source article draws on research conducted by the JRF and released in November last year. If one looks at that research one finds (see page 26) figures for pensioner poverty of 1.6 million (using the DWP’s “contemporary measure”) or 1.8 million (using the “fixed measure”). But these figures date from 2012-13, since which time the basic state pension has risen by pretty much double the rate of inflation and so will overstate the number of pensioners in poverty. “Almost 2 million” looks a little like what some call ‘political rounding’ but others might call disingenuous.

Perhaps more importantly, the JRF research shows, again, that pensioners occupy, demographically, a uniquely privileged position.

Pensioner poverty is now at a record low level; from having a greater risk of poverty than the rest of the population in the 1980s, pensioners now have the lowest poverty of any age group. But as that has happened, poverty among working-age adults has risen, and has never been higher than it is now.

Of course, there is no such thing as good poverty. But the act of picking out the least poor demographic and showering it with non-means tested goodies requires some explanation. Not least because in 2012-13 (the figure will be even higher now) 87% of pensioners didn’t live in relative poverty. What is the case for benefiting them, whilst 3.7m or 4.1m (page 26) children live in poverty? Sadly Corbyn gives none.

What is the explanation for non-means tested benefits rather than targeted help for the poorest pensioners? Again, there is none.

Surely it can’t be found in the inclination of pensioners to vote? Surely?

As to the cost of raising the single tier state pension to £182.16 Corbyn gives this as £22bn. But he’s not at all clear how it will be funded: here’s what he says:


Illuminating, this is not.

Corbyn has previously argued for an increase in the top rate of income tax to 50p but of late seems to have backed off that a little. The only comprehensive research on what such an increase would raise suggests a yield of around £100m (less than half a percent of the £22bn needed). But that research is well out of date – and there isn’t room for sensible doubt but that the same measure in 2020 would raise significantly more. But there are limits to how much the rich can be taxed.  The UK is no longer in the 1980s  when personal income tax rates hit 60%. The make-up of our economy, the shape of our tax burden, the mobility of our highest earners, all of these things have changed. And changed in a way that makes it less rather than more easy to impose higher rates of tax on the rich.

£22bn is a big number – beyond that which can be yielded by increasing taxes on the income of the rich. And, purely for scale, to raise £22bn through the basic rate would involve increasing it by 6p.

And all to benefit the least disadvantaged demographic we have.

Perhaps there is another £22bn out there for those 4 million children living in poverty, and another £22bn for the 8 or 9 million working age adults also in poverty? Perhaps there is a brave new world in which all shall have prizes? And all funded by our favourite type of tax – the one paid by someone else? But if I’m to be asked to subscribe to the existence of such a utopia, I’d like to know a little more first about how it all stacks up.