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The 50p tax rate
00:28:11
Chancellor George Osborne says a 50p tax rate does not bring in much revenue; Shadow...
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- [00:00]
A
Thank you for downloading More or Less from the BBC. This is the version of the programme first broadcast on BBC Radio 4. Here's Tim Harford.
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B
Hello and welcome to More or Less, the programme which takes the numbers out of the cut and thrust of political debate, gives them a sticking plaster and kisses them better. This week is David Cameron writes that we're all better off. We question claims about how many sickness benefit applicants have been found fit to work and we tot up the cost of having children. As my children hoard their pocket money, I'm saving up.
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A
I don't know what for, but I'm just saving up.
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B
But first, Shadow Chancellor Ed Balls has done some sums and come up with a plan. The latest figures show that Those earning over £150,000 paid almost £10 billion more in tax in the three years when the 50p top rate of tax was in place than when the government conducted their assessment of that tax back in 2012. For the next Parliament, the next Labour government will reverse this government's top rate tax cut so we can finish the job of getting the deficit down fairly. Now, this announcement has left a number of loyal listeners puzzled. Here's an email from one of them, Danny Banks. The Government states that the decision to cut the top rate from 50p to 45p reduced treasury income by only 100 million pounds. But Labour counter that almost 10 billion more was paid in tax in the three years the 50p tax rate was in use. They say. I can't see why there should be any argument. The treasury must know how much everyone earned after the tax cut because it had to in order to take the correct amount of tax from them. Why can't the calculations be rerun using the old tax levels and against the new data to find out how much tax would have been paid without the change. Danny, if only life were so simple. What you're suggesting would work perfectly well. If all the taxable income in the country was a sort of delicious, gigantic cake, then all the Chancellor had to do was decide how big a slice to take. But taxable income is a movable cake. It's a cake that shrinks from the taxman's cake slice and grows again when the taxman's out of the room and Ruth Alexander's here, the perfect person to explain the concept of a movable tax cake.
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A
Tim, I'm just thinking that after the lunch you've enjoyed, you should probably lay off the cake. But yes, the big issue here is the way that taxable income changes in response to tax Rates.
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B
Now, you might think that's odd. After all, Ruth, imagine you're earning an unassuming salary of 25,000 pounds a year, which is a little bit lower than the national average. You'll get a pay slip from your employer and it will tell you how much income tax has been deducted. If the Chancellor decides that tax rates are going up, then tough you have to pay.
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A
Although even that's not quite true, is it? As part of the Moneybox team, I know very well that I could increase my pension contributions and so avoid some tax totally legally, because money that I put into a pension doesn't count towards my taxable income.
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B
Quite so. And if you were making 10 times as much, say £250,000, that would be so nice. You'd be worth every penny, Ruth. But if you were making £250,000, you might well have ways to hide that income from the tax.
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A
Oh, yes. Using a web of evil genius accountants and secret Swiss bank accounts denominated in bitcoins.
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B
Well, there might be some of that for sure, but a lot of what goes on is much more mundane. A lot of people with that sort of income aren't salaried employees. They're the owners of small companies who take their income as share dividends rather than a regular salary. Or they might be in the banking industry, where, for various reasons, the banks prefer to pay money as bonuses rather than regular salaries. I've decided that the new rate will be 50% and will come in from April.
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A
Now, when the then Labour Chancellor, Alistair Darling, announced in advance that the top rate of tax was going up from 40% to 50% back in April 2010, banks and their employees could see that a big bonus paid before the tax rate went up would be worth a lot more than a bonus paid afterwards. So the bonuses were paid early when
- [04:11]
B
tax rates were lower. It was the same with dividends. There was an incentive to collect the dividend earlier, before the tax rate went up. When the 50p tax rate was brought in, HM Revenue and Customs reckoned that between 16 and 18 billion pounds of income was brought forward to avoid it. And that's a lot. That's more than 1% of the entire national income.
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A
And this is called forestalling, isn't it? And there's a mirror image of forestalling.
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B
Reverse forestalling. That's what happened when George Osborne announced in advance that the 50p rate of tax would be cut to 45p. So this time people delayed bonuses and they delayed dividend payments until the tax rate had fallen.
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A
Now, what's interesting is that this business of forestalling makes it absolutely impossible to figure out how much money the 50p rate of tax might raise in the long term. Because Alistair Darling pre announced the tax hike and George Osborne pre announced the tax cut, there was lots of opportunity to avoid the 50p rate of tax. We know it raised very little money, but we don't know how much money it might have raised in the long run when everything had settled down.
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B
Now, you might think that a 50p rate of income tax would be a big revenue raiser if only politicians would stop yo yoing around and give it a chance.
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A
We might. Except I can see you've got that economist glint in your eye.
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B
That's not the economist glint, that's my gold plated contact lenses. But there is another way in which people avoid paying income tax, and it's actually much more worrying than forestalling. It's by stopping earning altogether. Perhaps by retiring early, or perhaps by leaving the country to work elsewhere.
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A
I wonder whether that happens much.
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B
Well, possibly not, but perhaps it doesn't need to. Imagine that Ed Balls is Chancellor and he raises the top tax rate to 50p. And you, Ruth, you're earning your £250,000.
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A
Nice.
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B
So Mr. Balls is trying to get an extra £5,000 worth of income tax out of you, and that's an attractive prospect. But what if you and your £250,000 salary decide that's the last straw and you move to Ireland in the hope of paying less tax? Now, the Chancellor hasn't just lost that extra £5,000, he's lost all the income tax you were paying about £100,000. He's lost the VAT on the fancy products you buy. He's lost national insurance contributions from you. He's lost the fuel duty and the road tax on your Rolls Royce. He's lost the tax on the salary he used to pay your personal assistant. So you're quite right. People may not often leave the country in response to high taxes, but it
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A
can cost the Exchequer a lot of money when they do. So how much does this effect actually matter?
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B
Well, here's the thing we really don't know. The treasury uses a number called tie, that's taxable income elasticity elastic. You see, it's like a delicious stretchy cake made entirely of tax.
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A
Tim, focus.
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B
Yeah. So the bottom line is this. The Treasury's estimates for this elasticity look reasonable, but nobody really knows. According to the Institute for Fiscal Studies, the top rate of tax at which the treasury would scoop up. The absolute maximum revenue could be anything from below 30p to above 75p. That gives a sense of how uncertain it all Is. And the 50p rate of tax was introduced for such a brief time tells us very little.
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A
Now, we should probably get back to the man who started us off on this, Ed Balls, to ensure that those
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B
with the broadest shoulders bear a fairer share of the burden.
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A
As Shadow Chancellor, he thinks the 50p rate of tax should be reintroduced. And one reason he thinks that is because while HM Revenue and Customs once thought the 50p band wasn't raising much money, new information shows that it was raising a lot of cash.
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B
After all, he says the original HM Revenue and Customs calculation was published almost two years ago and it reckoned that if nobody changed their behaviour, the cut to 45p would in principle give up three and a half billion pounds of revenue. And that's quite a big number. That's about 10 days worth of government borrowing.
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A
But because such a big behavioural response was expected, HMRC reckoned that the cut would only cost £100 million, which isn't a big number. In fact, it's such a small number that George Osborne used it to justify reducing the 50p rate to 45p.
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B
The direct cost is only £100 million a year. Indeed, HMRC calculate the loss of other tax revenues may even cancel that out.
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C
In other words, it raises at most
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B
a fraction of what we were told and may raise nothing at all. So from April next year, the top rate of tax will be 45 pence. But now Ed Ball says that updated figures show this number must have been an underestimate, because it's been discovered that the 50p taxpayers paid in 10 billion pounds more than was thought at the time.
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A
And he's wrong. The figures Ed Balls is referring to have been readjusted. He's right about that. But they're not the ones HMRC used to make that estimate that the cut to 45p would only cost about 100 million pounds. David Phillips from the Institute for Fiscal Studies was the one who spotted the disparity.
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D
So the HMRC data that they used in their estimates of the revenue effects of the 50p rate was based on the self assessment data that was coming in as people returned with their tax forms in that data is better than the projections that they had published on their website back in 2012 and is actually pretty similar to the data they've now updated in 2013. So they were already using the more up to date data when they did the calculations.
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B
So in a nutshell, the £10 billion that Ed balls thinks was missing from the Government's analysis was actually in there right from the start.
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A
And David Phillips says the £100 million figure remains the most reliable estimate of how much extra revenue the Government could take in each year. But having said that, it's not that reliable. The HMRC report itself described uncertainty around the estimates.
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B
And £100 million a year isn't actually that much money. In the grand scheme of things, it's less than £2 a person or enough money to run the National Health Service for about eight hours.
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A
Remember also, the HMRC calculation doesn't include the risk that people leave the country completely and stop paying vat. It only includes loss of income.
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B
Now, all this sounds as though it's very easy for rich people to avoid tax.
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A
I asked David Phillips about that. He says the rich aren't actually quite as tax shy as some people think.
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D
I think it's also important to bear in mind there have been other tax changes that have also affected higher income people. There's been the restriction on the pensions contributions relief, and many have lost the personal allowance because that's been restricted for those with incomes above £100,000 per year. And both of those raise more revenue than would be expected from the 50p tax rate and mean that the top people are making a bigger contribution to reduction in the deficit than across most of the rest of the income distribution.
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B
The richest 1% of the population, according to tax filings, declare at least £160,000 a year of income. Now, collectively, they earn 13.7% of all earnings before income tax and they pay 29% of all income tax, which is the highest percentage in recent history.
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A
Although there are plenty of other taxes in the country.
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B
There are indeed. Ruth. Ruth Alexander. Thank you. Now, apparently all of us should be feeling pretty well off at the moment. We've already heard from the Chancellor and the Shadow Chancellor. So just to mix things up, here's an unnamed government minion telling us the good news after tax. Over the last year, take home pay has risen for many people a little bit faster than inflation. Now, not everyone's convinced of that. Although the economy seems to be recovering, I can't say that we're actually seeing any noticeable difference in our living standards. Absolutely not.
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D
And particularly if you work in the public sector.
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B
Our salaries are frozen to a 1% rise for the foreseeable future, if we get that. So it's definitely not. Inflation's still more than 1%, so it's definitely not getting any easier. In the interest of balance, here's a statement from an anonymous official Labour Party underling.
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A
We have constantly been seeing that there is a cost of living crisis.
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E
It's not a question of ignoring the statistics if we want to figures.
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B
The truth is that under this Government,
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A
real wages have fallen by over £1,600 a year.
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B
Interesting. The Labour Party says real wages are falling while the Government says they're rising. And I have a sneaking suspicion that both of them are in their own narrow way. Right now. Charlotte MacDonald's here. And Charlotte, let me give you a task. Let's say you're a spokeswoman for the Labour Party and you would like to make falling living standards look as serious as possible. How would you do that?
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E
Oh, it's not that hard. First, I'd avoid talking about what happened before 2010 because there was a massive banking crisis and recession and it's probably best not mentioned. But within that constraint, I'd pick a nice long time period and add up all the trouble over many years.
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B
What about inflation? Because these claims are all about whether earnings have kept pace with inflation or not.
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E
Well, obviously I'd pick the RPI measure, which is higher than the CPI measure that is now more commonly used. And I'd use wages before taxes deducted because that would make the problem look bigger.
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B
Right. So all of that would make things look as bad as they possibly could. And what conclusion would you reach?
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E
Well, that people are £1,600 worse off than at the time of the general election, which, by an astonishing coincidence, is indeed the Labour Party's position.
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B
Ok, now imagine you're speaking on behalf of the Government. How would you make things look as rosy as possible?
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E
Well, I'd compare April 2012 with April 2013. That's because wages in April 2013 were unusual.
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B
Why is that?
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E
Well, you were discussing it earlier in the programme. The top rate of tax fell in April 2013 and so people delayed receiving bonuses, so there was an artificial tax related blip.
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B
Ok, so that would increase apparent wage growth. What else would you do to make things look cheery?
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E
I'd compare wages with a CPI measure of inflation, which was half a percentage point lower than the RPI over the year in question. And I'd look at wages after tax because personal allowances have risen and that's increased some people's take home pay.
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B
Genius. And what conclusion would you reach?
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E
That for 90% of earners, all but the richest 10% wages rose by more than inflation. And of course, I Wouldn't mention cuts to benefits or the self employed, which is pretty much the way the government has presented things.
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B
Excellent work. A career as a spin doctor awaits. But, Charlotte. But taking a step back, what's the big picture?
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E
Well, the Institute for Fiscal Studies has been looking at household income, which is a broader measure than wages. Now, after inflation, median household income, that's
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B
the income earned by the household that's richer than half of all households and poorer than the other half.
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E
Exactly. After inflation, median household income has been falling and it's more than 6% lower than when the crisis hit in 2007. 08. Now, the IFS think that the fall has finally stopped this year. Now, the fall has been surprisingly evenly distributed. Poorer households have lost less in nominal terms and richer households have lost more. But the IFS thinks that difference is largely cancelled out by the fact that poorer households have been more exposed to rising costs of, for instance, heating.
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B
So income's been falling or stagnating for a long time and there are some signs that things are picking up now. And I'm curious, Charlotte, how much of this fall took place in the depths of the recession before the Coalition took over in 2010?
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E
Well, I wanted to get that info for you, but I went onto the Office for National Statistics website and unfortunately it was down,
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B
down.
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E
But this is an emergency and fortunately the ONS has an emergency website which is kind of brilliant. Alas, household income seemingly isn't considered an emergency statistic.
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B
Well, perhaps we'll be able to resolve that next series of. Thank you, Charlotte. Meanwhile, one particular cost of living has been making the headlines. Cost of raising a child surges past 225,000 pounds, which has prompted some hard conversations in the Harford household this week. Do you know how much pocket money I give you? Mummy gives you one pound. One pound per week. But do you actually get it?
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F
No.
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B
Did we give it to you often?
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A
No.
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B
Okay, so there are these people who are trying to sell me insurance and they think that I should be giving you five pounds pocket money every week. And I wanted to ask what you thought of that.
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A
Good. I think it's a bit too much.
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B
How much is about right, then?
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A
£2.
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B
£2. £2 is right. But £5 is too much?
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A
Yes, I guess.
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B
Well, what would you spend it on if I gave you five pounds?
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A
I have no idea.
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B
I'm saving up.
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A
I don't know what for, but I'm just saving up.
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B
The report was published by Liverpool Victoria, who, surprise, surprise, sell life insurance, which conveniently would help cover Those enormous costs should anything happen to a parent. So is there any truth behind what's frankly a rather scary number? 225,000 pounds per child. LV commissioned the Centre for Economics and Business Research, or CEBR, to crunch the numbers. And to do that they factored in the cost of some obvious things such as childcare, education, and some less obvious things like furniture and personal items. Let's take a look at some of their claims.
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A
From the day I was born until my 21st birthday, mummy and daddy will spend £66,000 on childcare and babysitting for me.
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B
Now, as Finley, age 5 astutely points out, childcare is a big cost for parents. But where does that 66,000 pound figure come from? Our man child, Ben Carter, has been looking into the numbers for the childcare figure.
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C
The CEBRs added up how much it would cost for a child to have 50 hours of childcare for 50 weeks of the year from the age of two to the age of five.
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B
Hang on, isn't that a bit of a worst case scenario? I'm sure some people do pay for 10 hours of childcare a day, five days a week with only a couple of weeks off, but surely that's close to the maximum. What's the average cost of childcare?
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C
When they talk about the cost of bringing up a child, they're not talking about the typical cost or the average cost. They're talking about the cost of a particular scenario they have in mind. For instance, all these children get driving lessons from their parents. And not only that, they get their first car. And I can give you another example.
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A
By the time I'm 21, mum and dad would have spent £73,000 on my education.
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B
Alfie, aged 11, clearly concerned about the amount his education is costing mum and dad. So have they included private school in that number, Ben?
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C
Actually no, that would be another hundred and twenty thousand pounds. But this number includes thirty thousand pounds
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B
for university costs, which again is a bit of a worst case scenario. Fewer than half of people go to university anyway and there are grants and loans available, so it's a bit steep to assume parents will definitely pay every single penny. And what about the other £43,000?
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C
Packed lunches and school uniforms?
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B
Where are they buying the uniform? Savile Row.
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C
Plus after school, club, private tuition and other expenses. So again, a very particular scenario in mind.
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B
Alright, I'm sure we could talk all day about these assumptions. For instance, my daughters were very interested to hear how much pocket money LV thinks I'm obliged to give Them taking a step back, what's the big picture?
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C
The big picture is that if you add up every cost you can think of over the course of 21 years, you will indeed get a big number, which is exactly what LV wanted. I imagine, leaving aside the really expensive times, which are potentially preschool, childcare and university, children can still cost around £8,000 a year. Now, Tim, I've done some quick calculations and according to this survey, your three children are going to cost you another
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A
£465,000 before they hit their 21st birthday.
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B
So what you're saying, Ben, is I got good value out of that vasectomy?
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C
Yes.
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B
Now, look, what bothers me is that from the newspaper headlines, you'd think some official number had been published. But there's not an official number at all. It's the same old trick of an attention grabbing press release. And some not entirely convincing assumptions.
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C
Yes. For instance, the Guardian points to the rising cost of children as the reason that one in five parents are delaying having more children.
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B
And just to enter the parallel universe in which we should take this number seriously, how fast is it rising?
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C
2.1% last year.
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B
And what's consumer price inflation?
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C
2%.
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B
Ben Carter there with the stunning news that the cost of having children may or may not be rising roughly as quickly as the cost of everything else. Thank you, Ben. You're listening to more or less million sickness benefit applicants fit for work.
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E
New figures show a third of all people who applied for sickness benefit were found fit to work.
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B
These were a couple of headlines inspired by figures published recently on the numbers of people applying for sickness and disability benefits. The numbers are from a five year period from 2008 to 2013 since the introduction of a new system called Employment and Support Allowance, which replaced the old incapacity benefit. Now the Government's keen to give the impression of clamping down on malingerers. And the headlines suggest the government has certainly been successful in clamping down on somebody. But we took a look at the numbers and decided on some headlines of our own from the same figures. Number of sickness benefit claimants drop by not very much.
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E
New figures show the number of people passing sickness benefits tests each year stays roughly the same.
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B
Our headlines are slightly more drab than the ones inspired by the Government's press release because the overall numbers of people claiming sickness and disability benefits hasn't changed much during this period. It's gone from 2.6 million in 2008 to 2.5 million in 2013. A harder test was introduced, but the numbers of new people going on disability benefit remain about the same, even though the numbers applying have increased. There are some people who used to get old styling capacity benefit and who have failed the new test, but 80% of people have passed. Now, there must be something in the air, because I've received a few wedding invitations recently, all of them several months in advance. But here's a tricky problem. If you have a wedding venue with a fixed capacity, how many people should you invite when you know that some people won't accept? This calls for a statistician, and his name is Damian Vukovic. He was planning his marriage to Joan Coe in Melbourne, Australia, and decided that the answer to his problem was statistical modeling. So did Damyan's spreadsheet help make that special day even better? I caught up with Damyan and Joan to find out and I began by asking Joan to outline their guest list conundrum.
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F
We were doing most of the wedding planning from the uk, actually. We'd spent the last four or five years in the UK and had lots of friends there and we both are from immigrant families. So the guest list had people all around the world. And while it's easy to work out if people in Melbourne, our hometown, could come to the wedding, it was a much more difficult task of working out what proportion or how many of the overseas guests would show up. So the challenge is to pick the right number of invitees so that we could get all our friends there, but not to overshoot the mark and to stop my parents from inviting their friends willy nilly as well.
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G
Yes. So one of the constraints for us was we picked a venue and we could only fit up to about 110 people comfortably. However, we had many more people than this that we wanted to invite. So we wanted to do what airlines often do, which is overbook, but do it in such a way that it wasn't very risky.
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B
But hang on, what's the problem here? Why not just mail out the first batch of invitations, wait for replies and then send out a second round and maybe a third round.
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G
That's certainly one way to do it. But sending out invitations and getting replies, that actually takes a long time because some people don't reply. And then suppose you want to send out the next batch, you have to go and chase them down. And the other problem is some people might get an invitation in the second round and then if they're comparing notes, they might wonder, oh, what's going on here? Are we not in the best tier of friends, so to speak?
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B
The squeeze is on. Then the Venue is limited to 110 people. The guests might be coming from almost anywhere in the world. And Joan and Damyan have given themselves only one shot at this. Damyan and Joan listed all the people they might want to invite to their wedding. They divided them into categories, depending on how far away they were and how firm the friendship was, then estimated the probability that a guest in each category would show up. They made some other assumptions, too. For instance, that couples would either both come or both stay away. That there were no other influences, such as FA cup finals, high airline prices, or rival weddings, which might simultaneously influence lots of guests to stay away. As Damyan and Joan waited for the acceptances to drop through the letterbox, they were confident that, statistically speaking, Having posted exactly 139 invitations, success was almost certain. So 100 acceptances would be too few, 110 would be too many. How many people finally did show up?
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F
In the end, we ended up with 105, which was, you know, within that perfect range of 100 to 110.
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B
That is brilliant. A triumph for statistics. Hang on, hang on, hang on, hang on. Tell me again, Joan, 105 people turned up, but how many of them were in your original spreadsheet?
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F
Oh, I think it was a little bit less. I think it was 97 in the end.
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B
What, what happened?
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F
We had that problem that weddings often have people showing up who probably didn't get that invitation in the first round. So I think you should always have a buffer for people with new partners that you didn't know about or friends or family that your parents have accidentally invited.
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B
So the model was wrong, but you, you hit it on the nail anyway?
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G
Yes, that's right.
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B
A triumph for statistical modeling.
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F
Excellent. All the errors cancel out.
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G
That's right.
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B
Joan Ko and Damian Vukovic. So the key message for all you statistical modellers out there is if you can't be right, then be lucky. And you can read more about Damyan's number crunching in Significance magazine online, but many congratulations to the happy couple. Do please keep your comments and questions coming to moreallessbc.co.uk. you can download this program and many other editions at our website, BBC.co.ukmoreorless if you do this, you'll hear the secret short editions of More or Less we make while we're off the Radio four airwaves. And you'll be guaranteed not to miss us when we return in May. Until then, goodbye.
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A
More or Less was presented by Tim Harford, the Financial Times undercover economist. It was produced by Ruth Alexander and made in association with the Open University. You can Download many more Radio 4 programmes for free. Find these@BBC.co.uk Radio 4.