From the TUC

Cameron on the 50p tax

02 Oct 2009, by in Economics, Politics

David Cameron is remarkably coy about the new 50p tax rate in the Spectator. He seems to be saying, “I’m not falling into the Labour trap of giving a clear commitment to repeal it, but I’m going to leave enough wiggle room to be able to repeal it after an election.”  The Guardian is right to headline this “Cameron to scrap 50p tax if it proves a failure.”

The argument against the 50p tax rate is put by Fraser Nelson in the interview:

… a tax that will, according to the Institute of Fiscal Studies, lose the Exchequer about £800 million a year as the richest move themselves (or their money) elsewhere. Why on earth, I ask him, does he think this tax will raise revenue when all independent research suggests otherwise?”

But there are two problems with this.

First, while the IFS are surely right that the super-rich will try and avoid paying this tax, should we simply run up the white flag and therefore give up trying to make them pay a fairer level of tax? The response should be to crack down on the tax avoidance methods they use. They may not be entirely successful, but it cannot be the case that it is impossible to raise more tax from the super-rich which seems to be Fraser Nelson’s premise.

If true, that would be outrageous. The right response to this would be anger – not a shrugging of the shoulders.

Second, even if introducing the new tax (without taking other anti tax-avoidance measures) does not raise that much money because it encourages tax avoidance, it does not follow that repealing it would have little or no effect. This would require those who had adopted additional tax avoidance tactics to stop using them and go back to paying higher rate tax on more of their earnings.

I don’t think so.

4 Responses to Cameron on the 50p tax

  1. Adam Lent

    Adam Lent
    Oct 2nd 2009, 4:44 pm

    Fraser Nelson is talking rubbish. This is a tax on people earning over £150,000 – how many of those are genuinely mobile enough to move away and how many are able to set up complex and expensive tax avoidance schemes? Some of them undoubtedly but probably not a majority. Also people talk about this as though when the Treasury assesses the revenue likely to be generated by a tax change they don’t take into account behavioural changes of that sort. They do.

  2. Alex
    Oct 2nd 2009, 8:36 pm

    “Adam Lent, on October 2nd, 2009 at 4:44 pm Said:
    Fraser Nelson is talking rubbish. This is a tax on people earning over £150,000 – how many of those are genuinely mobile enough to move away and how many are able to set up complex and expensive tax avoidance schemes?”

    Actually quite a lot. Leaving aside self-employed businessmen, the other big sectors that earn substantial salaries are lawyers and accountants (£500k-£1m p.a. for partners at the biggest firms) all of whom would be quite capable of tax avoidance schemes, and financiers, particularly traders of all descriptions, all manner of fund managers and wholesale insurance brokers/underwriters, all of which categories could move their operations from London to any other European city where there was sufficient critical mass, for example Paris, Zurich or Frankfurt.

    Many of the latter are quite mobile, having moved to London from the US or other European countries.

    If a high earner’s tax rate goes up from 40% to 50%, they can either increase their gross income by 20% to make up the difference, or move to a country with a tax rate comparable to the UK. Lots of them will move, because the low tax rate was one of the reasons they came to the UK.

  3. Adam Lent

    Adam Lent
    Oct 2nd 2009, 9:07 pm

    Alex: I’m sorry, I simply don’t buy this. We are constantly told by the finance sector that we have to support the City because the UK has great comparative advantages: its time zone location, the fact it is English speaking, its excellent professional educational facilities, its cosmpolitan and exciting capital. But apparently this all pales into insignificance when minor changes are made to our tax regime. We heard all this nonsense, when the changes to the domicile tax regime were announced: there was no exodus.

    Many of those who are earning the figures you mention are already probably practicing tax avoidance anyway, they won’t pay the 50p rate until we really crack down on avoidance. But there are plenty of others not earning nearly that amount who will pay this tax and won’t be able to escape it.

  4. Alex
    Oct 3rd 2009, 12:21 am

    “Alex: I’m sorry, I simply don’t buy this. We are constantly told by the finance sector that we have to support the City because the UK has great comparative advantages: its time zone location, the fact it is English speaking, its excellent professional educational facilities, its cosmpolitan and exciting capital. But apparently this all pales into insignificance when minor changes are made to our tax regime. We heard all this nonsense, when the changes to the domicile tax regime were announced: there was no exodus.”

    Yes, you lop 16.66% off somebodies net income and expect them to hang around? The next 10% increase will lop off 20% of their earnings. Moving offices is easy for bankers and traders. All they need is a communications link. The biggest change in the last 10 years finance has been the impact of the internet which means that these people no longer have to be grouped together linked by low speed telecommunication networks. They could be anywhere, and it is only inertia and lack of a reason to move that has kept them in London. Putting up the rate of tax gives them that reason.

    Moving to London was attractive when the personal tax rate was one of the lowest around, and importantly for the Americans, slightly lower than the US. Since US citizens pay US taxes on their worldwide income with credits for foreign taxes paid, they are indifferent as to where they will go provided that the tax rate is lower than the US tax rate, because they always end up paying the same total amount of tax. But putting the tax rate higher than the US rate makes the UK a place for Americans to avoid.

    Bear in mind that most US firms who send employees abroad agree to equalise the employees after tax income so that they have the same standard of living as at home. This means that US firms will choose to avoid sending employees to foreign countries with high tax rates. This is in addition to any expatriate benefits, such as rented housing in their foreign posting, annual trips back home, some of the education costs for their children at universities back in the US, all of which are taxable. A middle level manager earning £100,000 in base salary might receive additional benefits in kind while on a foreign posting and the tax on that has to be equalised. The result will be that US firms would move any European headquarters out of the UK. MacDonalds have just moved theirs to Switzerland. Believe me, I have been involved in international corporate moves of whole departments. Companies really do look at the tax costs of locating staff in different countries and they do switch countries for cost reasons.

    London is far from unique. Forty years ago when the London market grew, English was only spoken occasionally or reluctantly in most countries, particularly in Southern Europe. That has changed completely and English is the common business language throughout Europe, which ironically means that whereas native English speakers might have some skills that they can sell in Europe, there are plenty of other English speakers so London has lost that advantage. I have worked in Paris, Basel, the Netherlands, Brussels, New York and London, so maybe I don’t think moving to another country is such a big deal.

    I wouldn’t expect an exodus so much as a slowdown in the volume of London business, mostly because when foreign expatriates come up for the end of their period of time in London, they won’t be replaced but their job will move to Frankfurt.

    The comparison to non-doms is spurious because the proviion doesn’t apply unless the non-dom has been resident in the UK for more than 10 years, and even then the really rich non-doms can get off by paying a £30,000 levy, eqivalent to 50% tax on £60,000 of income. Most of the foreign bankers and traders in London will stay for less than 10 years.

    The main beneficiaries of non-dom status seem not to be bankers but first or second generation immigrant businessmen who can claim a residual attachment to a foreign country, by numbers Indian or Israeli, but by absolute wealth also a lot of very rich Europeans.