The reduction of the top rate of UK income tax from 50p to 45p, on earnings over £150,000, has led to an increase in the tax take. The tax cut was brought in at the insistence of the Conservatives, despite Labour predictions that it would lead to reduced revenues.
The figures were released by Her Majesty’s Revenue and Customs (HMRC) and show that in the year since the rate was cut revenues have increased by £9bn to £49bn.
The increase has more than made up for the £5bn reduction associated with the government taking the two million lowest earners out of tax altogether. When the Chancellor, George Osborne, cut the 50p rate, the Treasury calculated the policy would cost the exchequer £100m. Instead, the move reduced tax avoidance and has turned into a large cash windfall for the cash strapped Treasury.
John Redwood MP, a former Conservative leadership contender, said the news “will be a shock to many of the conventional pundits who have taken the precaution of not reading the latest HM Revenue and Customs figures which get in the way of their usual prejudice on the topic.”
The former Secretary of State for Wales argues the 50p rate “was costly” as the UK lost high earners to other countries, and that some people are able to “declare less income when rates are high”.The HMRC figures show people earning more than £2m declared an income of £12.2bn in 2012-13, but paid tax on £26bn the following year after the rate had been lowered.
Ryan Bourne, Head of Public Policy at the Institute of Economic Affairs, said: “This is further evidence that ‘bash the rich’ populism just doesn’t work. Whichever way you cut it, and even allowing for forestalling effects, these figures show that tax rates have a significant effect on the behaviour of those on high incomes.
“The 50p rate was past the peak of the Laffer curve – that is, it was actually bringing in lower revenues than a lower rate. Those who want it reinstated should therefore explain who else they would impose higher taxes on elsewhere to recoup the revenues they are willing to sacrifice.”
The Laffer Curve is an economic model that shows the relationship between the level of tax and the total resultant tax take. It shows that no tax will be raised at a rate of zero percent, but nor will any at 100 percent as no one would work if they took home no pay from it.
On the curve there is an optimum position, where tax is low enough to ensure the maximum number of people are motivated to both earn and properly declare their incomes. It is unclear whether 45p represents the optimum position, as a further cut may increase revenues more. However, the HMRC figures to show that the government is now closer to the optimum position.
The Labour Party is still committed to bringing back the 50p tax rate, they originally enacted it in 2010.