Speaking in Parliament today, George Osborne said this:
(thanks to the Guardian’s Andrew Sparrow for the report).
I don’t have the number to which Osborne refers but it is broadly in line with what was forecast in May 2015 which showed a projected increase in income tax paid by additional rate taxpayers of £7.1bn.
Does this increase vindicate, as Osborne suggests, to the tune of £8bn of extra receipts the decision to cut the 50p rate?
Reader, it does not.
To understand the effects of cutting the rate you’d need to understand what receipts would have been if Osborne hadn’t cut the rate with effect from 2013/14 and compare them to the actual receipts for that year.
No one has done that exercise since the cut but HMRC did some projections beforehand. It calculated that cutting the 50p rate to 45% would cost money, some £360m over five years.
So how do we explain that £7bn increase in receipts?
As Osborne well knows, if you tell people in March 2012 that you’re going to cut their tax bill by a tenth (from 50% to 45%) in a year’s time, people will choose to delay payment until April 2013 when their bills will be lower. And they did.
First, we knew they would do this at the time:
Second, HMRC said in May of last year that it had happened:
In other words, tax receipts were artificially low in 2012-13 (because people delayed receiving income until rates fell) and were artificially high in 2013-14 (when those delayed receipts were received). Combine those two numbers and you may well explain your £7bn jump.
Third, you can buttress the point if you look at the change in the composition of receipts from Additional Rate Payers in 2012-13 to 2013-14.
- There was little point to them delaying basic rate employment income: the percentage tax bill on that remains static. And in fact the basic rate employment income receipts actually fall from £1.78bn to £1.73bn.
- There was little point to them delaying higher rate employment income: the percentage tax bill on that also remains static. And the higher rate employment income receipts rise by a modest 7% from £11.2bn to £12bn.
- But on additional rate employment income, where their tax bill falls by a tenth, there is an increase of over 19%.
That delaying tactic is likely to explain most or all of that £7bn difference. At paragraph A.26 here HMRC forecast that £6.25bn of income would be moved from 2012-13 to 2013-14. A £6.25bn reduction in 2012-13 receipts plus a £6.25bn increase in 2013-14 receipts would give you a difference in expected tax receipts of 45% of £12.5bn or £5.625bn in tax. (That calculation makes the sensible assumption that only income benefiting from the cut – i.e. taxable at 45% rather than 50% – is pushed forward a year).
But it’s not only that Osborne has been a little economical with the truth. It’s not only that, on all the available evidence, his tax cut actually cost money. It’s that the whole episode signals a terrible indictment of Government policy.
Osborne could have taken measures to prevent these delaying tactics – which remember only benefited those earning over £150,000 per annum – but he didn’t.
And this cost the country £2.4bn in 2012-13: see Table A3. (Although it should be noted this figure will unwind in part in later years.)Follow @jolyonmaugham
Flattering the figures is as old as time.Politicians and journalists being lazy minded is all too common.
These are the reasons that the masses accept and believe bullshit
Is it in here somewhere? https://www.gov.uk/government/statistics/personal-incomes-statistics-tables-31-to-311-for-the-tax-year-2013-to-2014
The acid test will be the receipts for 2014-15 and 2015-16, but it is too early to tell.
This Chancellor does like booking one-off or up-front adjustments, even if they have a negative tail. I am sure he hope to be in a better job once they run out and the negatives become clearer…
Thanks Andrew. I wasn’t aware of that series.
I’d be interested in what measures could have been taken “to prevent these delaying tactics”. Would you suggest taxing dividends before they have been received? Or would you suggest deferring tax relief on charitable donations until later years?
I’d also be interested in what the extra yield (or loss of yield) would be if the assumption of £8bn was the extra tax raised and that there was a deferral of £6.25bn of income (to give the extra £12.5bn of income you mention). Would it be more or less than the £360m cost originally estimated?
tax legislation routinely adopt measures to prevent taxpayers from forestalling or (here) anti-forestalling. You’d know that if you bothered to look rather than – as is your inevitable response to much that I post – to make bad points.
I’m afraid I don’t understand your second point.
I’m not aware of any rules that tax income that has not yet arisen (like a dividend or discretionary bonus). I am aware of plenty of rules that tax income that has arisen but which has been placed in another person’s hands in the meantime (e.g. DR, MP, DIMF, notional ACT and so on). I am also aware of anti-forestalling legislation that deals with expenditure (e.g. HIERC). But I don’t see how you can tax income that has not yet arisen in a fair / objective tax framework. What am I missing?
In terms of my second point, the extract from the 2012 red book you quoted (the £360m comment) says the 2013/14 cost was forecast to be £50m.
2. George Osborne’s quote at the start of your post says that for 2013/14 there was an increase of £8bn of revenue. So that is a £8.050bn difference on those two numbers.
3. You explain that some of the difference relates to £6.25bn of income that has been deferred. You calculate this as amounting to £5.625bn of tax.
4. So if the difference is purely as the result of the deferral then the £8.050bn difference falls to just £2.425bn. So, all things being equal, this suggests that red book’s estimate of costs was a long way out.
5. But all things are not equal. So I was wondering whether you think that, for example, the red book was right and the cost was only £50m? Or whether the forecast was too pessimistic and it actually did raise £2.4bn of revenue. Or something else?
Re-reading, your post I see you say that this deferral of income “is likely to explain most or all of that £7bn difference”. From the numbers you have set out, I can understand “most” but £2.4bn (or £1.4bn if £7bn is the right number) is a long way from “all”.
As far as me making bad points, I’m sorry. If I had more skill then maybe they would not all be so bad. But for now I’m seem stuck with the abilities that I seem to have. And you are more than able to censor the comments.
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Taxing income that has not arisen: perhaps accruals on debt securities would be an example, taxed under the accrued income scheme. No income arises until the accrued amount is actually paid, but it can be taxed nonetheless (in most cases, it can be considered a reclassification of part of the disposal proceeds, but “dry” charges can arise).
For an example of anti-forestalling in an income tax measure, see the rather complicated transitional provisions around the introduction of the disguised remuneration rules in 2011.
Announcing significant tax changes far in advance of the change (such as the introduction and abolition of the 50% tax rate) has a significant behavioural effect, which is why measures changing tax rates often come into effect (almost) immediately. It must be assumed that policymakers understand and condone those effects if they announce such measures with many months of lead time but take no steps to prevent forestalling.
Andrew, I agree that with accrued income, accrued preferred dividends, disguised remuneration, mixed partnerships, disguised investment management fees, settlements legislation, etc it is easy to do that as it is clear what income will arise for a period and so payment of that income does not determine when the tax charge arises. But that is very different to anti-forestalling rules on income that is discretionary (e.g. dividend on an ordinary share, discretionary bonuses).
The anti-forestalling rules on disguised remuneration effectively looked at when the individual got the cash and then created a tax charge on 6 April 2011 if that cash had not been repaid by then. So again, very different to what would be needed to prevent the deferral of income that has not (on a realistic view of the facts) already arisen.
From my perspective, the announcement of the delay in the reduction of 50% to 45% tax was 100% political (tax take has gone down, then wow aren’t we great, tax take has gone up). But I believe that (absent the obvious deferral opportunity) there were significant behavioural differences with a 47% marginal rate v 52% marginal rate. It resulted in a step change in the attitude of people with a higher income.
“clear what income will arise for a period” – accrued interest is not necessarily paid, though.
If you wanted to deter forestalling (or the reverse) there are no doubt several ways you could do it without taxing income that has not already arisen: for example, if your income in year 2 (taxed at a lower rate) is “significantly greater” than your income from the same source in year 1 (taxed at a higher rate) then say half of the “excessive” amount could be taxed at the higher rate anyway. A little like the smoothing of large pension contributions.
Agreed on the accrued income Andrew. But it’s easy to work out what period interest is for (i.e. just use the accruals basis).
The difficulty with your “significantly greater” test is that it will catch so much more than the intended target. So, for example, if someone gets a lot of sales commission (or dividends) in year 2 because they had sold a big project (or made a big profit on that project) in year 2 then it doesn’t seem fair to tax some of it at year 1 rates.
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