Given that we all know the IFS is as infallible as the Pope, it'll be interesting whether this revives last week's debate on the subject, and what the Martin Luther of the bash-the-rich campaign, Richard Murphy, has to say on the subject. Actually, beyond the headlines, Paul Johnson,director of the IFS sounds a bit less certain. He's quoted as saying, “It looks like the 50p rate may be too high and that it is possible it will reduce tax revenues." Hmmn. "Up to £500 million", "looks like", "possible it will reduce". We're not quite there yet.
I have followed this subject with interest ever since I discovered that a close family member pays a small amount of tax at the 50p rate. It's a salutary experience, discovering that the Government is taking half your marginal income. For some reason, whenever the BBC wants to get two people to go head to head, it wheels out Richard Murphy, director of Tax Research LLP, an articulate, passionate and well-informed maker of the case for higher taxation, and some Chicago-school back woodsman like Patrick Minford, from whose gabble it swiftly appears he made up his mind that lower taxes were a good thing back in 1946 and hasn't thought about it for longer than two minutes since.
That may be just a coincidence. In these debates the presenters always talk about "taxing the rich", as if the term were not itself loaded. Although I know quite a lot of people who undoubtedly pay tax at the highest rate, I wouldn't describe them as "rich". For me, the rich are people born with a silver spoon in their mouths sitting on their backsides in a country retreat, whose children are rah-rahing all the way to Klosters. The people I know merely have good jobs. That's not the same thing. The true rich tend not to have jobs at all. Moreover, none of the those people got where they are because of daddy's largesse. They got it by working really hard for the last thirty years. So when I hear people talk about "taxing the rich more", I have to give myself a nudge: they're really talking about taxing more the hardest-working. It doesn't quite have the same ring to it.
Of course, when a country is broke, as we are, the Government needs every penny it can get. You can hardly blame it for taxing people who, if not actually "rich", at least have a fair bit of wine in the cellar. So does the 50% rate bring in more tax or doesn't it? Obviously I personally have no idea. I know of course about the Laffer curve, which postulates that there must come a point at which raising taxes brings in less revenue not more. But leaving aside the view of the IFS, reputed to be a thoroughly scrupulous organisation, I have sometimes thought that the way that Richard Murphy conducts himself in argument suggests that he might secretly hold the opposite to his publicly stated view.
But more interesting is the stuff Murphy doesn't mention. One is that the truly rich, reluctant to up sticks themselves, might nevertheless move their assets somewhere else. That does not require removal men. It takes a couple of phone calls. Another is that a marginal tax rate hike from 40 to 50% provides people with a massive incentive to people who have never bothered with tax avoidance measures to start bothering now. Furthermore avoidance measures which didn't make economic sense two years ago can suddenly become viable when tax on marginal income has effectively increased by 25%.
I have never heard Richard Murphy acknowledge these factors.
A close family member reports in the following terms. "A couple of months ago we went on a routine visit to the accountant. He told us that as a result of the tax rise it now made economic sense to formalise the ad hoc work I did to support my partner's business. I would have to pay tax myself, of course, but at a much lower rate. The result of this was that the Revenue would now get about £3000 less tax from us than when the marginal rate was 40%. As far as we were concerned, the tax rise had cost the Revenue money".
This is tax avoidance, and perfectly legal. It turns out that Mr Murphy has been doing some avoidance of his own. Blogger Tim Worstall appears to be suggesting here - http://timworstall.com/2010/08/24/in-which-we-are-challenged-by-richard-murphy/ - that Murphy has gone further, in particular that he set up a company and paid himself and his wife equal dividends, even though his wife did little work. I have no idea whether this is true or not, but the blog is well worth a read and includes Murphy's response.
Stop press: Although I don't do Twitter, I understand Murphy's tweeted response to the IFS report is that the 50% tax rate must be working, or else no one would want to get rid of it. A superficially impressive point. If, thinking back to the Laffer curve, the marginal rate were 99% and people wanted to get rid of it, would Murphy still be saying that the rate must be working? No. That people want to get rid of a tax is no guide either way to its effectiveness.
