Mini-Budget? You’re having a Laffer

The Mini-Budget seems to have involved more than a rabbit from up the Chancellor’s sleeve!

But, when it came to the abolition of the 45% rate of tax and its justification, an old friend came out to play.

And I’m not talking about the rabbits!!

Yes, Mr Laffer. A man famous for doodling on napkins and… errr… curves.

The relevant Mini-Budget Bumf (now seemingly called “Fact-sheets”) included the following:

“Despite the reduction in the additional rate from 50% to 45% in April 2013, the share of total Income Tax liabilities accounted for by the top 1% of taxpayers by income rose from 25.1% (£39bn of £157bn total) in 2012-13 to 28.3% (£71bn of £251bn total) in 2022-23.

This has echoes of George Osborne who said the following, back in March 2016:

“Figures published this morning by HMRC contain, for the first time, the income tax data for 2013-14, which was when the 50p rate was reduced to 45p.

“The data reveal that in that year there was an £8 billion increase in revenues from additional-rate taxpayers, which completely defies the predictions made by the Labour party at the time”.

Of course, Mr Osborne was talking about the reduction in the 50% tax rate to 45% in April 2013.

The total amount of tax collected from additional rate taxpayers rose from £38 billion (2012/13), to £46 billion (2013/14). This represented a rise of £8 billion despite the 5% reduction in tax rate. Empirical proof that Laffer’s principle was alive and kicking?

Not so fast…

There is a problem with this conclusion. It did not take account of how this temporary raise in the tax rate changed behaviour including:

• Where possible (eg where a taxpayer could control / influence, say, dividends), payments of income were accelerated to take account of the rise to 50% – meaning the receipts for 2012/13 were artificially low; and

• Where possible, payments of income were also deferred until 2013/14 and the reduced 45% – meaning that 2013/14 receipts were artificially high

The newly published Government “fact sheet” therefore repeats this error. It does not take into account the distortion in the figures due to behavioural changes.

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