Peter Young is a fiscal policy adviser to the Adam Smith Institute.
In justifying his decision to cut the top rate of income tax to 45% George Osborne relied upon the report from HM Revenue and Customs (HMRC) on the revenue effect of the 50% additional rate. This report deserves to be much more widely read, especially given some of the ill-informed if not plainly silly commentary on the Chancellor’s decision. Indeed it is surprising, given the strength of the arguments in the HMRC report, that Osborne did not make the full cut to 40%, rather than the 45% compromise.
HMRC was asked to report on the revenue or exchequer effect of the 50% rate, and concluded that the last Government’s estimates of the amounts that it would raise were vastly exaggerated. “The underlying yield ....is much lower than originally forecast....and it is quite possible that it could be negative,” said HMRC, who condemn the 50% rate as “a highly distortionary form of taxation.”
HMRC’s report makes many of the same points as the Adam Smith Institute report on the revenue effects of the 50% rate which Miles Saltiel and I produced over a year ago. They highlight its damaging migration effects, which are today much more pronounced given increased international labour mobility, “which means that the adverse effect of high rates of personal taxation on both inward and outward migration to the UK and tax revenues can be significant.”
The report highlights the key role in creating economic growth of both highly skilled workers and FDI: “High marginal rates of income tax risk weighing on the growth potential of the economy by deterring the most highly productive individuals from living and working in the UK, and through deterring the foreign direct investment that can be an important element in the diffusion of new technologies and techniques”.