Osborne's 45% tax rate has already cost us billions

When George Osborne announced he would slash the top rate of tax from 50% to 45% - he made some ridiculous claims about how the 50% tax rate (in effect for only one year) had not raised much money (see point 2 of this post).

It was clear that £16 billion of tax had been brought forward (mostly in high earners' bonuses) to avoid falling under the 50% rate.

Today it became clear that same thing seems to have happened in reverse: to avoid the 50% tax rate the bonuses of the highest earners have been deferred to fall under the 45% rate.

The Morning Star reports:

"Britain has been conned out of billions of pounds by scheming bosses who put off their bumper bonuses until after bankers' mate George Osborne slashed the top rate of tax"

Indeed. The evidence is clear from table in the ONS Labour Market Statistics released today which shows that compared with a year ago finance sector bonuses were up 75%, in construction up 63%, and in the service sector up 52%.

Given any pick up in the economy is only marginal - and in some sectors non-existent - then it is patently obvious that businesses have deferred bonuses (largely the preserve of the top earners) to collectively avoid billions in tax.

As I told the Morning Star:

"Just as bonuses were brought forward to avoid the 50 per cent rate when it came in, so now bonuses from last year were deferred to avoid paying it again."

"At a time when the coalition is failing to reduce the deficit and has jacked up VAT on all of us, this tax cut for the highest 1 per cent of earners is a disgrace.

"These figures show that Labour would be right to restore the 50 per cent rate and to do so without notice to prevent avoidance through income-shifting."

And indeed to his credit, one of the few sensible things that Ed Balls said last week was that Labour favoured "keeping the 50p tax rate" - and let's hope he meant 'restoring' too should Labour get back in office in 2015.

Laughably the Treasury "dodged the evidence", the Morning Star reports - and instead commented that the 50p tax rate was "not effective at raising revenue" - which is a spurious claim given the billions of income shifted forward and then back to avoid it ... something that would not have been possible had the tax been in place for consecutive years, without the announced reduction.

So there we have it, the rich dodge their taxes thanks to Osborne's forewarned tax cut, the Treasury dodges questions and denies the evidence that contradicts Osborne ...

Redistributing ... to the rich

Andrew Fisher, LEAP co-ordinator looks beyond the fluff to discover the real issues in the Budget. (This article first appears in the May 2012 edition of Labour Briefing)

Pasty tax, charity tax, granny tax and even caravan tax – if you live too much of your life on planet Twitter then you’d be forgiven for thinking these were the main issues in the Budget.

I admit, as someone who doesn’t tan I was initially perturbed about #pastytax until I realised it referred to Cornish pastries rather than a lack of cutaneous pigmentation.

But the real stories of the Budget – involving the big billions – were about the more commonly known income and corporation taxes. Osborne gave corporate Britain another cash giveaway: taking corporation tax down from 26% to 24%, and committing in his statement to reduce it further to 22%, with the aspiration of reducing corporation tax even further.

"So that by 2014, Britain will have a 22% rate of corporation tax ... And a rate that puts our country within sight of a 20% rate of business tax that would align basic rate income tax, the small companies rate and the corporation tax rate."

This largesse to big business will cost the Exchequer an extra £3.76bn in the period covered by the spending review. This is on top of the £25bn in tax breaks for business announced in 2010 which included Osborne's commitment to cut corporation tax from 28% to 24% over four years.

Now Osborne will cut taxes for big business to 22% over the same period. It is not as if the previous government had been loading the tax burden on business either. Under the New Labour, corporation tax fell from 33% to 28% – which LEAP estimated cost the exchequer £50bn over 13 years.

So how does Osborne's new corporation tax rate compare with other countries? He was kind enough to tell us in the Budget:

"A headline rate that is not just lower than our competitors, but dramatically lower. 18% lower than the US. 16% lower than Japan. 12% below France and 8% below Germany. An advertisement for investment and jobs in Britain."

 So more like ... Ireland? And by coincidence that is a country that Osborne deeply admires. It was Osborne who said in 2006, "Ireland stands as a shining example of the art of the possible in long-term economic policymaking". The problem isn’t that Osborne said that in 2006, but that he still believes it now!

Ireland has been through an even more adverse austerity shock doctrine than Britain, and has slipped back into recession this year. Slashing corporation tax simply undercuts the tax base and hinders recovery.

But it does something else – it redistributes wealth. Lower corporation tax means larger net profits, so instead these larger profits go to large shareholders in dividends and directors in bonuses.

Those same directors will be laughing all the way home from their banks thanks to Osborne slashing the top rate of tax from 50 to 45 per cent. That will cost £3bn per year, which will stay in the pockets of the richest 1% in the country.

This was the issue that Ed Miliband led on when he rose in the House of Commons to challenge the Chancellor’s Budget. It was an uncharacteristically forceful performance, coruscating Osborne for cutting taxes for his Cabinet mates and their chums, while doling out austerity for the 99%.

Of course, Ed Miliband went from that to photo opps in Greggs, and jumped on every bandwagon (or should that be caravan?) going. Now he leads the charge against cutting tax reliefs for wealthy philanthropists – from class warrior to woolly liberal in two weeks. It is a snapshot of his leadership – vacillating, inconsistent and ultimately inconsequential.

So back to the Budget. The lost corporation and income tax revenue requires other taxes to rise to make up the void and/or public spending is cut.

In a throwaway remark, Osborne casually added that to balance the books “we would need to make savings in welfare of £10 billion by 2016”. This is on top of the £20 billion in welfare cuts already set out and being implemented with much misery and resistance.

What was unique about this comment, was that when you delved into the Budget Red Book (the lengthy tome that accompanies that parliamentary pantomime) there was no detail. In fact all you could find is that the precise figure is £10.5bn and neither Treasury nor social security ministers could say where a penny of these new cuts would fall.

The Budget highlighted that we have an incompetent government waging class war let off the hook by a pallid (some might say pasty) opposition.

Follow LEAP on Twitter
Follow Andrew Fisher on Twitter

PRESS RELEASE: Questions to answer over Osborne’s dodgy dossier

This press release was issued today, following our post yesterday on the HMRC's publication on the 50p tax rate.

PRESS NOTICE:

FOR IMMEDIATE RELEASE:

Questions need to be answered over Osborne’s Budget Day dodgy dossier

LEAP has raised several serious questions about the dossier used by Chancellor George Osborne to justify cutting the 50% tax rate at the Budget last week. The dossier, published by HM Revenue & Customs (HMRC) ‘The Exchequer effect of the 50 per cent additional rate of income tax’ was published on Budget Day, and makes the case for the 50% tax rate to be scrapped and replaced with the 45% rate.

Today (26 March) is the last day of the post-Budget debate, culminating in a vote on the Budget. LEAP Chair John McDonnell will be raising this issue in Parliament, which has led to a tax cut for the highest 1% of earners at a time of austerity.

LEAP’s analysis raises questions about a numbers of issues, including: political interference in drafting the dossier; the efforts made by HMRC in maximising compliance with the 50% rate; and why HMRC based its assumptions on different Taxable Income Elasticity measures in 2009 when the tax was announced.

John McDonnell MP, LEAP Chair, said:

"There are serious questions to be answered by George Osborne about the political impartiality of this document, in light of the analysis by LEAP – which raises massive doubts about the conclusion that the 50% rate will raise only an additional £100m.

"I will be raising this issue in Parliament because it is of deep significance to the both the justice of our taxation system, and to the integrity of the civil service."

Andrew Fisher, LEAP Director, said:

"This dodgy dossier is deeply flawed in its analysis of the tax avoidance associated with the 50p rate. Its politically convenient and economically dubious conclusions seem more like the work of political placemen than politically neutral civil servants. There are several questions that need to be answered if taxpayers are to have any faith in the tax system.

"Osborne claimed that the 50% tax was bad for Britain’s competitiveness, yet in the Budget debate he justified cutting it by claiming other measures would raise five times as much from the same group. The Chancellor is spinning both ways, but we need to get to the truth."

-Ends-

The LEAP analysis can be read in below on the blog

The coalition's dodgy dossier - Questions that need to be answered

Waking up this morning, Cameron's government has more immediate concerns than the fall-out from the Budget. Cash for access is nothing new (Greg Palast exposed LLM and New Labour ministers in 1998), but it will further batter Tory poll ratings ahead of the May elections.

However, I think there's another scandal about to emerge, which also has echoes of another New Labour previous: a dodgy dossier.


The document is the publication by HM Revenue & Customs (HMRC) used to underpin Osborne's case for reducing the 50% tax rate to 45% in the Budget. (Richard Murphy has also raised questions about the dossier and its conclusions)

Now we know the HMRC has form (e.g. tax deals with Vodafone, Goldman Sachs, and numerous other multinationals and wealthy individuals). But it is still an executive agency of HM Treasury and staffed by politically neutral civil servants.

There are echoes again of HMRC's lax attitude to tax avoidance in this statement, which bears deeper analysis:

"there was a considerable behavioural response to the rate change, including a substantial amount of forestalling: between £16 billion and £18 billion of income is estimated to have been brought forward to 2009-10 to avoid the additional rate of tax. This behavioural response is entirely legitimate, and difficult to prevent using anti-avoidance legislation."

The first issue with this statement is the value judgement that avoidance activity is "entirely legitimate". It's true to say that New Labour was stupid in signposting with a year's notice a tax rise to the super-rich, but what does it tell us about the culture of HMRC at the highest levels, that they believe rich people avoiding tax is "entirely legitimate"?

The second issue with this statement is what it - and the dossier throughout largely - doesn't say: that this was a single year effect. It is obvious that high earners would bring forward bonuses, dividends etc by a year to avoid paying so much the following year when the 50% tax rate came in. But that cannot be repeated, so the £16-18bn in years two and subsequent would give us an extra £1.6-£1.8bn in revenue.

Although the document is largely carefully couched and liberally littered with pharses like "the estimates above are subject to a wide range of uncertainty" that is not reflected in either a) what Osborne said the Budget; and b) it's own ridiculous conclusion.

Cunningly, the dossier's conclusion is not to be found in Chapter 6: Conclusions. Instead, the real conclusion is to be found in the extra-dodgy Annex A - Table A2 of which contains Osborne's highly dubious claim that reducing the rate to 45% will only cost the Exchequer £100m (allowing him to claim his stamp duty changes will raise five times as much).

Much of the document is based on an academic concept: Taxable Income Elasticity (TIE) which in simple terms looks at the responsiveness of taxable incomes and tax revenues to different tax rates. Again in simple terms, the lower the TIE score the lower the opportunities for avoidance.

For the purposes of the document, HMRC uses a TIE of 0.48 (see Chapter 5), yet the calculations used in 2009 (when the 50% rate was announced) were based on a TIE of 0.35.

But HMRC is not a neutral academic observer of TIE. Its role - surely (at least in theory) - is to maximise tax revenues, a large part of which is to mitigate against tax avoidance. Even Osborne in his Budget statement said "I regard tax evasion and – indeed – aggressive tax avoidance – as morally repugnant".

So if HMRC identifies a higher TIE, it should not be simply reporting it, or worse suggesting tax rates should fall in response, but producing a practical strategy to minimise avoidance.

So the questions that need to be asked are these:

1. Was there an earlier draft (or drafts) that was less conclusive?
2. What input was there from ministers or their special advisers?
3. Who signed off the final document?
   
4. Why was the HMRC commissioned to do this analysis and not the 'independent' OBR?
5. Why was a TIE of 0.35 used (presumably by HMRC) in 2009, but a TIE of 0.48 used in 2012?
6. Why did HMRC not suggest practical steps for reducing this avoidance?
7. Will HMRC and HM Treasury publish all correspondence relating to the commissioning and drafting of this dossier?
8. What behavioural analysis has HMRC or HM Treasury completed or commissioned on the effects of the new changes to stamp duty?
   

The most dishonest Budget ever?

The Budget speech is pure parliamentary pantomime, but even that was undermined this year by the numerous (and mostly accurate) leaks beforehand.

One surprise came before the budget, when February borrowing figures were published and shown to be far higher than expected at £15.2bn. This meant that there would be no net giveaways in the Budget, and reinforces what we have said throughout: if you really want to tackle the deficit you need to get people working (off benefits, paying tax) and spending (VAT revenues) + deficit closes. Even John Cridland, CBI chief, was on Radio 4 this morning conceding the real problem in the UK economy is lack of demand.

But back to the Budget, and to the theme promised in this blogpost's title: dishonesty. Here's a quick rundown of some fairly serious obfuscation or outright lies:

1) A further £10.5bn of welfare cuts
Osborne was rather opaque in his Budget statement, saying:

"I am today publishing analysis that shows that if in the next Spending Review we maintain the same rate of reductions in departmental spending as we have done in this review, we would need to make savings in welfare of £10 billion by 2016"

In the Budget red book (pp.87-88) the figure of £10.5bn is given by 2016-17 and £6.6n by 2015-16, but there is no specification at all as to which bits of the welfare budget might be targeted. All the red book states is:

"The Government will be examining the cost drivers for all areas of public spending, and identifying the further reforms needed to deliver a sustainable welfare system and public services within the resources available."

Of course the major reform that Osborne could pursue would be to create jobs. The OBR projections show even by 2016 unemployment will still be above 2 million. But what this unspecified £10.5bn shows is that Osborne's economic policies are failing, and - although his sums don't add up - he has already decided those with least should pay for it.

2) The higher rate tax stats
If the 'dodgy dossier' of the Blair government was Alistair Campbell's sexed-up Iraq work of fiction, then this government's own will be this gem from HMRC. All the same questions need to be asked because it looks less like the work of an impartial civil servant and more the work of a Tory researcher, without much in the way of analytical skill or economic nous.

It's major crime is to say it hasn't raised much (and less than predicted), only £1bn. A figure Vince Cable dismissed as not much. Of course that was hindered by £16bn of income shifting - highly paid people bringing forward their pay, bonuses, etc to avoid getting hit for 50% when it came in. In future years, such income shifting is impossible, and the amounts raised would be much higher - the Treasury document seems to think over £3bn per year.

The dodgy dossier talks long and gibberishly about the laffer curve (see our take here) and makes some very spurious conclusions that people avoid a 50% rate at £150,000, but not a 45% rate. Go figure!?

Finally of course is the brass neck with which Osborne, Cameron et al claim their stamp duty reforms will raise five times as much from the rich. Of course there'll be neither avoidance on any of that nor any behavioural changes as a result of these new taxes on selling homes worth £2m or more.

But what is most dishonest in some ways is the contradiction between Osborne's bluster against tax evasion and avoidance - "I regard tax evasion and – indeed – aggressive tax avoidance – as morally repugnant" - and the fact that in the face of large scale (though largely temporary) avoidance of the 50p rate, he has decided to reduce it.

Thankfully though, HMRC tells us, it will only cost us £100m per year. Of course if they have got that wrong (and they have) then we can expect more cuts or more borrowing.

3) The 'Granny tax'
I use the twitter-defined name as a shorthand, but Osborne has done is to freeze age-related allowances - the amount of income over-65s can earn tax-free - for existing pensioners, and scrap the relief for those retiring after April 2013.

This will cost millions of mid-income pensioners about £250-300 per year. It is a stealth tax on pensioners, and come May will probably prove as electorally misguided as Gordon Brown's 75p increase in the basic state pension over a decade ago.

The extra dishonesty factor about this is two-fold: 1) it was the only major item in the Budget not trailed in advance; and 2) Osborne announced it in his statement by saying "we will simplify the tax system for pensioners by doing away with the complexity of the additional age-related allowances".

4) The distributional analysis
Alongside the Budget, Osborne published the 'distributional analysis' to show the effects of the changes he has made on people's incomes (Annex B of the Budget red book).

What it does not include is the cutting of the 50p top tax rate to 45p - which would save someone like Bob Diamond at Barclays over £300,000 per year - as apparently "presenting a static analysis would not be representative of likely actual impacts".

What is also necessarily excluded from this analysis is the yet-to-be-specified but committed to £10.5bn extra welfare cuts which will disproportionately hit the lowest income deciles.

So what we see is an analysis that omits both the big tax break for the rich, and the future hammering of the poor. Convenient.


There are other things in the Budget too that will become clearer in time:

• Osborne promised "growth-friendly planning and employment laws" - which is short-hand for 'the environment and workers' rights be damned'
• The pension age will rise beyond 68: "I can confirm today that there will be an automatic review of the state pension age to ensure it keeps pace with increases in longevity". The problem with this is that increasing longevity is highly unequal, i.e. the richer are increasing their life expectancy at a quicker rate than the poorest. This is doubly bad news since poorer people also cannot afford to retire early, so their retirement gets squeezed, while the rich live for longer in retirement.

A Mansion Tax misses the spot!

Press release from the Labour Land Campaign

One of the aims of a Mansion Tax is to collect a share of the untaxed wealth the rich currently enjoy. However, its advocates fail to recognise why very expensive properties are so expensive: it is the location of a building that creates high property prices not the building itself.

Advocates of a Mansion Tax also fail to realise that many of the owners it aims to tax in this way will avoid paying it once introduced. It doesn’t take much nous to predict that overnight a £2.3million home would suddenly only be priced at £1.9million but with the contents priced at £.4million.

Vince Cable apparently fails to recognise what gives a property its value – the building value and the location value. The building value will always deteriorate as happens with all second-hand goods. However, the location value of any property (commercial or residential) is due to society’s overall demand to be located in that area. That demand is determined by a site’s accessibility to public transport, roads, schools, hospitals, other health care, leisure facilities, natural beauty, shops, employment/workforce etc.

Eleanor Firman, Chair of the Labour Land Campaign (www.labourland.org) says “It is society’s combined public and private investment that generates land values – not the owners of land who can - and do - leave land idle and still see it rise in value without lifting a finger.

Much better for the Government to abolish property taxes, increase the personal allowance on income tax, reduce VAT and introduce an Annual Land Value Tax on all land according to its optimum permitted use. This would immediately bring idle sites that blight our towns and cities into full use and reduce the demand for urban sprawl. The wealth that our taxes create would be returned to the public purse to maintain and develop our public services.”

ENDS

The Morning Star also covers this issues and covers the publication of the TUC's new report Is 50/50 fair? which looks at the 50p tax rate.

Here's a short excerpt:

According to the TUC the Treasury could raise more than the £3 billion it originally forecast from the 50p rate if it tackled tax avoidance.

Mr Barber added that calls to scrap the 50p tax are about the richest 1 per cent trying to dodge paying their fair share of tax and making everyone else pay more instead.

Left Economics Advisory Panel co-ordinator Andrew Fisher stated that lowering the 50p tax to earners on £100,000 and putting a 60p rate on those on £150,000 would be fairer.

He said: "We now need a real debate throughout the labour movement on fair taxation, to include new wealth and land value taxes, as well as reducing regressive taxation like VAT."

Tax 'em til the pips squeak

A letter from the Morning Star 16/02/12

There is a very simple way to deal with the bankers' "bonus culture" that nobody seems to be talking about. Tax it!

In the 1970s, for taxable incomes over £20,000 (equivalent to around £170,000 now) we had a tax rate of 83 per cent. On "investment" income (that is from gambling on the capital markets) it was 98 per cent.

If employers really think their executives are worth it, let them pay these obscene bonuses, but let us at least tax them so that the rest of us, upon whom their businesses depend, will get a cut in the form of more money for public services.

Of course, there is no way that this government will take such a step, but that does not mean we should not talk about it.

Of course, if we had a government that took such a measure there would be the usual cry that all these fantastic "experts" will migrate.

Good riddance, I say. Nobody is indispensible. There will be always be people who can grow into the jobs that need to be done, who will not demand bonuses for the jobs that they are already being paid to do.

Jerry Jones
London SW19

Update 17/02/12: YouGov poll shows how popular more redistributive tax would be:

• 62% feel that taxes on the wealthiest people in the UK should be increased ... only 5% feel they should decreased
• 68% say that George Osborne should not abolish the 50p rate of income tax for people earning over £150,000, 19% say he should abolish it
• 66% of Britons would support a new tax upon people with houses worth more than £2 million, while 19% are opposed to this 'Mansion Tax'

Clegg sheds crocodile tears for the poor

From today's Morning Star

Nick Clegg shed crocodile tears for struggling families today as he called for a tax cut for low earners to be brought forward.

The Deputy Prime Minister said he wanted the coalition to "go further and faster" in exempting those earning under £10,000 from paying income tax.

He said in a speech to the Resolution Foundation think tank that "bluntly the pressure on family finances is reaching boiling point."

Raising the personal allowance to £10,000 was a Lib Dem manifesto pledge but it is being delivered in stages and will not be complete until 2015.

"Household budgets are approaching a state of emergency and the government needs a rapid response," Mr Clegg admitted.

His Tory bedfellows will see his comments as a daring breach of Cabinet conduct where declarations on tax are generally left to the Treasury.

Mr Clegg also took a pot shot at the tax policies of the "traditional left," sarcastically labelling it "a badge of socialist success."

"Socialists will support a penal rate of tax on the highest earners simply because it makes them poorer," he sneered.

But Left Economics Advisory Panel Co-ordinator Andrew Fisher argued that Mr Clegg's speech was little more than crocodile tears.

He said: "Clegg refers to the squeeze on low-paid people as if that had nothing to do with the pay freezes, benefit and tax credit cuts, the VAT rise and all the other regressive measures that his government introduced while doing nothing about soaring food, energy, fuel and rail costs.

"Raising the personal allowance for income tax to £10,000 is an admirable aim.

"But it should be coupled with redistributive measures at the other end of the pay scale such as reducing the 50 per cent tax rate to £100,000 and adding in a 60 per cent rate at £150,000.

"Clegg's government is also halfway through cutting corporation tax from 28 per cent to 23 per cent, and this should be reversed.

"Clegg rails against tax as a badge of socialist success - and indeed it is.

"Higher taxes were essential in building and maintaining the welfare state, the NHS, free state education and council housing - all under threat from Clegg's corporate giveaway government."

Also a good Guardian editorial today on this subject.

McDonnell: 50p rate 12 years too late and tokenistic

John McDonnell MP, LEAP Chair, said:

"Although the 50p rate is a small step in the right direction, it really is twelve years too late and a tokenistic measure, given that the poorest will stay be paying more of their incomes in tax than the rich*

"For the Government to announce tax avoidance measures amounting to only £300m per year, is derisory when £100bn is estimated as lost to the Exchequer by tax avoidance."

*Currently, the poorest 20% of people lose nearly 40% of their total income in direct and indirect taxes, compared with a national average of 35.3%. The figure is 34.8% for the richest 20%.

Richard Murphy has a similar take: "It's a start . . . But they need to go much further to ensure more reliefs and allowances cannot be used to avoid their duty to society."

Darling’s higher rate tax plan long overdue . . . but not enough

The Government will today announce the introduction of a new 45p top rate of tax on incomes over £150,000 - but not coming into effect until after the next General Election.

John McDonnell, LEAP Chair, said:

"The introduction of a higher rate of tax for high earners is long overdue but the Government's proposals are hardly a revolution, and delaying them until after the next election is pointless. The higher rate should be the start of creating a fair tax reform agenda, redistributing wealth from the super rich in order to take the low paid out of taxation altogether.

"The Government should also move immediately to tackle the large scale tax avoidance by the corporate sector, introducing legislation to outlaw tax havens, mirroring the Obama bill in Congress. The public revulsion over City bonuses and bank executive salaries has opened the way for radical tax reform. Government must seize the moment."



Listen to John's reaction from BBC Radio 4 Westminster Hour

Read Prem Sikka's article 'Rebalancing the Books' on Guardian Comment is Free

Update: Excellent piece by Richard Murphy on why VAT cuts won't work.

Update 2: John McDonnell on Comment is Free says "This is no time for fearful half measures"