Theo Brainin

Is tax avoidance a reason to drop the 50p rate?

The argument we are offered for dropping the 50p rate is that it encourages tax avoidance. That’s the point Osborne made today:

A 50p tax rate can only be justified if it raises significant sums of money. 

What the HMRC report reveals is that 50pc rate has caused massive distortions. £16bn was shifted into previous year, costing the taxpayer £1bn.

Self-assessment receipts this year are below forecast while other receipts have held up.

I’m surprised it bears mentioning, but the fact that people seek to avoid paying higher rates is not a clear reason to drop those rates. If 50p is a fairer rate (as the Tory line seems to suggest), it’s a reason to make it harder to avoid paying. Presumably, many will seek to avoid paying the new 45p rate as well – indeed, they’ll seek to avoid paying all tax insofar as it is possible and worthwhile to do so. That’s why HM Revenue and Customs exists – most people don’t just give their taxes to the government out of the goodness of their heart. If the top tax rate was 1%, and HMRC didn’t bother to enforce it effectively, a lot of people wouldn’t pay. Needless to say, that wouldn’t provide a pragmatic reason to lower rates.

If, as Osborne says, he wants to get more out of the rich, then he has to admit that any counter-productivity in raising their rates is the government’s own failure. Making tax rates effective is their job. They both set the rates and enforce them. Is their claim that they simply cannot find ways to get people to pay a 50p rate? I haven’t heard any strong arguments along those lines that aren’t equally applicable to the new rate, or the original 40p rate.

Dropping the 50p rate because people try to avoid paying it is a little like ceasing to arrest criminals because they try to avoid getting caught, or attempt to get off on technicalities. You can either concede defeat, and relax your requirements, or you can strengthen enforcement and close loopholes. If, for some reason, it is truly not feasible to sufficiently reduce avoidance at this particular level of tax, fine – but I haven’t seen any evidence of that.

Osborne’s is the same sort of maddening logic I wrote about yesterday – the government takes as its premise the failure to perform one of its functions (maintaining the transport network, or collecting tax fairly), and concludes that it should stop performing the function at all. The other option remains ignored: do a better job.

n.b. Osborne’s point about shifting income into a previous year doesn’t make much sense to me either, because presumably that’s only been a problem because rates were lower the year before. As soon as you have two consecutive years with 50p at the top rate, wouldn’t ‘shifting’ your income be pointless? I could be wrong, I’m no accountant, but it doesn’t seem like much of an argument for changing things.

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2 comments on “Is tax avoidance a reason to drop the 50p rate?

  1. And now I'll have to pay 40% as well.
    March 21, 2012

    People try to avoid all taxes (ISAs, paying ‘cash in hand’, non-duty fags and booze, not declaring additional income etc.) so, as you’ve pointed out, this is not a valid reason for dropping the rate. It is, however, a convenient narrative that much of the public can understand vs. the economic arguments about investment, laffer curves, etc. I ‘m afraid that you’re forgetting that the budget is a political announcement rather than an economic paper.

    • theobrainin
      March 21, 2012

      Sure, that’s true enough – but my point wasn’t that Osborne is actually dropping the 50p tax rate because of avoidance, rather that “the argument we are offered” doesn’t make sense. Politicians dissemble all the time, often through necessity, but that only makes drawing out the tensions/incoherence implicit in their statements more worthwhile.

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This entry was posted on March 21, 2012 by in UK Politics and tagged , , , , , , , , .

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