Big taxes, small print. Do Labour's 50p tax claims add up?

The problem with tax policy is that there’s always rather a lot of small print. Hidden beneath that big figure about the benefits of your proposed tax change are a whole load of assumptions (often untested) and provisos (usually unvoiced).

The upshot is that every time anyone announces a tax change it triggers a frantic search by critics to unearth small print proving the entire policy is actually a disaster. A case in point is the current row over the top rate of income tax.

The saga (or this chapter of it) began back in 2012, when the coalition Government cut the top rate of income tax from the 50p level introduced by Alistair Darling. One of George Osborne’s chief justifications for reducing it to 45p was that the higher rate never raised that much money in the first place.

The Chancellor brandished a paper produced by HM Revenue & Customs which worked out an overall cost of just £100m – in other words, when everything was taken into account, the fiscal impact of cutting the tax to 45pc would be only a tenth of a billion pounds a year. A snip!

Of course, there was small print – reams of it. Most worrying of all was the small print revealing that the £100m figure was largely reliant on some unproven assumptions. For it transpired that HMRC had in fact calculated the cost of the tax cut at £3bn in total. However, it went on to reason that based on Britain’s typical proclivity to avoid taxes or stop working when rates get too high (taxable income elasticity), a full £2.9bn of that would be lost through avoidance and forbearance anyway.

The question of whether those assumptions are right or wrong will continue to be debated for many more years to come. After all, a slightly different assumption on taxable income elasticity could cause that figure to be vastly different. However, a host of reasonable institutions, including the Institute for Fiscal Studies and the Office of Budget Responsibility, came out in support of the HMRC numbers – albeit with a healthy dose of caution.

Well today, in the wake of Ed Balls’ Saturday announcement that he would raise the top rate of tax back up to 50p, Labour launched another attack on that 2012 HMRC document. It vastly understates the potential revenues from a 50p tax rate, the party says, pointing out that since 2012 HMRC has revised up its assessment of top rate tax revenue by £9.5bn. This small print, the party says, undermines those original assessments about the cost of cutting the top rate of tax.

The problem is that in fixating on one element of small print, Labour seems to have ignored another.

It is certainly true that HMRC has sharply increased the estimates in its Survey of Personal Income of how much tax was paid by high earners under the 50p tax. However, it just so happens HMRC did not rely on this survey to put together its assessment of how much cash was raised by the 50p tax, relying instead on different, self-assessment statistics. And unlike the other HMRC numbers, those stats haven’t much changed since 2012, so the original HMRC estimate is probably the best we have for the time being.

Which is to say an increase in the top rate of tax to 50p would probably raise about £100m. However, that number is based on assumptions that could easily be wrong. And that’s before you take into account the probable tax avoidance that would no doubt happen given the Shadow Chancellor has explicitly promised that the tax would be in place only temporarily for one Parliament.

Still, I’m informed by colleagues it’s good politics, so I suppose we could just ignore all of the above. Or we could try to ask deeper questions – for instance: why have Britain’s tax revenue levels been so static for decades (see chart below); or why do we tax income comparatively more than we tax wealth?