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.)