The spike in tax receipts was caused by individuals deferring income and bonuses to benefit from the new 45p rate, not a surge in earnings.
By George Eaton
The latest borrowing figures are being trumpeted by the Tories as evidence of the success of George Osborne’s economic plan, with tax receipts up by 7% compared to last year. But what they won’t mention is that this spike has more to do with high earners avoiding the 50p tax rate than it does with any rise in earnings. By deferring income and bonuses from 2012 until this year to take advantage of the new 45p rate, taxpayers have caused a £2.9bn increase in receipts. But with earnings growth of just 0.7% in the most recent month, it’s far from certain that this improved trend will continue.
As the OBR notes in its commentary on the figures:
Growth in both income tax and NICs for the year-to-date is above the full year forecasts, but this largely reflects the fact that receipts in the first few months of the year benefited from the deferral of some income/bonuses to take advantage of the reduction of the additional rate of income tax to 45p and some temporary effects in non-PAYE income tax. Prospects for PAYE and NIC receipts growth will depend on the feed-through from the low growth in average weekly earnings in the latest data.
The IFS similarly warns:
It is important to note that some of the strong growth in receipts observed earlier in the year may not be expected to persist for the rest of the financial year, as it may be the result of some high income individuals pushing part of their income from last year into the beginning of this tax year in order to take advantage of the reduction in the higher rate of income tax.
And with individuals paying tax at 45p, rather than 50p, the Exchequer is left out of pocket. Osborne’s stated justification for abolishing the 50p rate was that, due to mass avoidance, it raised “just a third of the £3bn” expected. But while it’s true that £16bn of income was shifted into the previous tax year – when the rate was still 40p – this was a trick the rich could only have played once. And as the government has acknowledged on other occasions, tax avoidance isn’t an argument for cutting tax, it’s an argument for stopping avoidance.
Having falsely claimed that the (anomalous) first year of the 50p rate proved that it was ineffective, the Tories are now using the (anomalous) first year of the 45p rate to argue that they were right to scrap it. We’ll never know how much the 50p rate would actually have raised – and that is just as Osborne intended.