I wouldn\’t say I entirely believe these figures but….

It would be very interesting if they were accurate, wouldn\’t it?

Around two thirds of Britain\’s highest earners deserted the UK after the 50p top rate of tax was introduced, according to figures.

While some 16,000 workers declared an income in excess of £1million in the 2009/10 tax year to HM Revenue and Customs, that number dropped to just 6,000 after then Prime Minister Gordon Brown brought in the new tax rules.

Tax paid by the top earners fell from £13.4billion before the top tax rate came in to £6.5billion in 2010/11.

That would make the peak of the Laffer Curve for the UK\’s income tax somewhere below 50 %, wouldn\’t it? And given that we\’ve actually now conducted the experiment, got an answer, we know this and we\’ll not increase tax levels over the peak of the curve again, eh?

Interestingly this empirical result also accords with the theoretical one in Diamond and Saez. Which was, you recall, that the peak is up over 70% in a system without allowances in an America where you can\’t just leave the country. But is 54% in a system with allowances. And that is the total tax rate, not just the income tax rate. So one needs to shoehorn in the employers\’ national insurance under that 54% rate.

How excellent, theory and reality agree: the peak of the Laffer Curve for the UK is under 50%. Now that we know this we can put the matter to rest, eh?

38 comments on “I wouldn\’t say I entirely believe these figures but….

  1. While it doesn’t affect the “Laffer Curve” bit of your argument, all bar the Daily-Hate reading of the figures would suggest income substitution rather than emigration as a plausible explanation for at least part of the drop.

    Largely, I suspect, because many of the high-wage (as opposed to high income) jobs simply aren’t that easy move. It does, for example, make a difference being based in Geneva, as opposed to London – different mix of sorts of finance.

  2. Sorry, that would be “Daily Hate headline reading”, the article does mention the alternative. Just below the two spectacularly unflattering pictures.

    Gideon looking more like a Bond villain and Ed, well, gurning …

  3. SE> Raise income taxes, the incomes declared go down. Classic Laffer. I agree that the inference that the workers left is unjustified, but one certainly can’t argue that they didn’t stop paying the income tax.

  4. but one certainly can’t argue that they didn’t stop paying the income tax

    Which is why I didn’t. Nor did I take the Richie route and argue that they continued earning the money and just engaged in a bit of tax avoidance or evasion (however they liked it or however Ritchie choses to define them.)

    I thought that “While it doesn’t affect the ‘Laffer Curve’ bit of your argument” was a bit of a give-away on the point I was making?

  5. I wonder what was the number the year before. I remember reading about a lot of people paying themselves large dividends before the new rates. I don’t think a single year is a very good experiment. There is too much scope for moving income for a year or two at those levels (anyone with a company can easily do that).
    Also nobody believed the current government would keep the 50% rate. Surely that’s important as well.
    I agree it’s a data point, but I would call the experiment somewhat flawed.

  6. Surely a lot of the drop in people declaring (or, more precisely, earning) £1 million is the huge collapse in City salaries/bonuses.

  7. Neither the Daily Telegraph nor Daily Mail articles on this subject had any evidence that anyone actually left the UK, let alone the ridiculous DT headline “two-thirds of UK millionaires left the UK”.

    Though I see this has now been changed to “disappeared from the UK”.

  8. I know I’ve banged on about this before, but this data has nothing to do with the hypothetical Laffer Curve, which is based on aggregate tax receipts from an aggregate tax level across the whole economy. It’s apples and oranges.

    It’s like people who belive in Keynesian multipliers, then when you actually try to tie them down as to what they think they mean, what you find is it’s nothing to do with the arithmetic in The General Theory.

    This is a “rich buggers will fuck off if they don’t like the particular bit of the tax regime they’re subject to if there’s a foreign tax regime they find more desirable” argument, and it’s probably true. But it’s not the Laffer Curve. The Laffer Curve has nothing to do with people leaving. It’s how much tax you take in aggregate from the people who are left behind under a certain aggregated tax rate.

  9. As noted above, the “people left” narrative is absolute bullshit.

    Wages peaked the year before, because everyone whose employer had cashflow and discretion to bring payments forward (whether expressly or implicitly) sought to ensure as much money as possible was paid early.

    Had Labour stayed in power, then there would have been an interesting and genuine experiment in the first year of the tax, which might have made it possible to determine its Laffer-related position.

    But there wasn’t, because the Tories got in and committed to abolishing the tax after a year. So everyone who had the cashflow to tolerate it and whose employer was willing to defer income (whether expressly or implicitly) sought to ensure as much money as possible was paid late.

    In other words, it proves either nothing, or a bit less than that.

  10. I’m a bit sceptical about this deferring income thang.

    I can understand that there are few down-sides to having to bring it forward (e.g. cash sweep the business or structure a comp package with a bigger up front piece ) but I’m a bit sceptical that the tax benenefits are such that people are really asking their employers to defer comp or leaving cash in their companies for a couple of years – particularly small trading companies).

  11. Jono: the Tele data is “people paid a million quid in taxable salary income”.

    In the UK, this consists of partners in LLPs, senior investment bankers, and FTSE CEOs. While there are other people who rake in more than a million quid a year, they don’t do so in a way that’s taxed as income, because that would be deranged (even for locally domiciled footballers and pop stars, it’d be sensible to pay yourself a year’s worth of party money and leave the rest in your services company).

    Partners in LLPs, senor investment bankers, and FTSE CEOs are usually in a reasonable position liquidity-wise, as obviously are people with services companies.

  12. @jono

    “I’m a bit sceptical that the tax benenefits are such that people are really asking their employers to defer comp or leaving cash in their companies for a couple of years”

    I presume that those who own their own business and take a 200k salary and have a mortgage and kids at private school won’t be the ones deferring income.

    The 60 year old with a business and a big paid-for house and enough cash in the bank to fund his winter holidays in Barbados is the sort of person who has deferred taking out a 150k+ salary.

    Similarly a well paid SME owner in York isn’t go to be moving to Dubai to avoid 50p tax but a well paid bond trader at Morgan Stanley can easily relocate overseas.

  13. john b (#13), partners in LLPs can’t defer tax by leaving their money in the business, because LLPs are tax-transparent (just like other partnerships).

  14. I wonder if there’s any connection between this story and the one a few days ago, that record numbers of young well-educated workers have been leaving the UK?

  15. Do we really have to debate the laffer curve with evidence.

    Surely St Margaret proved this thirty years ago by dropping the tax rate from the 90′s down to 40% and tripling the tax take as a result?

  16. Johnnydub, could you point me at some reading about St Maggie’s tax slashishing revenue soaring antic? I hadn’t heard that before and there’s several people I would love to annoy by sharing the story if I had something to substantiate it with

  17. Well, according to this tax receipts tripled… by 15 years after Mrs Thatcher became Prime Minister.

    In the 15 years prior to her becoming PM, tax receipts had multiplied by over six times.

    Make of it anything you like. That’s the joy of post-hoc econometric analysis.

  18. Hmm

    “Partners in LLPs, senor investment bankers, and FTSE CEOs are usually in a reasonable position liquidity-wise, as obviously are people with services companies.”

    I don’t know any partners in LLPS , senior investment bankers or FTSE CEOs with service companie! None of the big professional services LLPs or investment banks will let you have a service company.

  19. @7 do you have a link to a huge drop in bankers’ bonuses? I seem to recall tabloid outrage every year.

  20. @ Richard
    The tax take from higher rate tax increased after Geoffrey Howe reduced the marginal rate of tax from 83% on earned and 98% on unearned income to 60%. This is one of the reasons qwhylefties claimed income inequality vastly increased under Thatcher – because the Gini coefficient is taken from data of taxable income, rather than actual income, using HMRC data. I can’t find a link to HMRC for this, so at short notice the best I can give you is Hansard
    http://www.publications.parliament.uk/pa/cm198889/cmhansrd/1989-10-19/Orals-2.html
    I can still remember that there was a vast deal of schadenfreude among young professionals on PAYE who had suffered declines in real incomes during the Wilson/Callaghan years at the news that lots of fat-cat tax consultants who had made, not earned, large sums in the 70s were on the dole

  21. Ian B>

    “That might just be because we’re producing excessive numbers of graduates for whom there is inadequate demand.”

    That doesn’t explain why it’s the best leaving first. (I have no non-anecdotal evidence for that statement, before anyone asks. Almost everyone I know around my age is seriously considering emigrating or has already gone, and the better qualified they were, the quicker they got out. )

  22. diogenes…just because there is tabloid outrage doesn’t mean it ctually happens. Most of the top end city bonuses are paid at least partly in stock, and that vests over 3 years. So, given 2006/7 was the peak for profitability, the 2009/10 tax year would see the vesting of all that stock, including Mr Diamond where his stock reward for the sale of part of their asset management business to Blackrock was implied to somehow have come from that year’s operating profits. The following year’s deferred bonus would have amounted to bugger all and hence the three year lag causes a lot of them to drop out.

  23. I looked into the forestalling/reverse forestalling question earlier this year when the rate was cut to 45p. Sorry, everyone – especially Tim – but HMRC’s figures actually prove precisely nothing at all except that Osborne is an astute politician who has created an opportunity to claim that Labour’s high-taxation schemes generate less tax than sensible Conservative plans. And his claims will magically appear correct just nicely in time for the 2015 election. Quelle surprise.

    I don’t like doing this – always feels wrong to advertise my own writing on someone else’s blog – but as I did look into this in some detail and most of you don’t seem to have done, here’s my post on the matter:

    http://coppolacomment.blogspot.co.uk/2012/03/forestalling-tax-avoidance-and-politics.html

  24. Mark T – I agree that some share option bonuses will probably have fallen out of the money in the period under concern but I think that most banks shares have been relatively flat over the last 5 years, so options will have vested, (maybe that is just my subjective experience of my holdings showing through, because I did not sell before the crash). But I still seem to recall a lot of headlines about record pre-tax and exceptional adjustment profits for banks…so I was wondering if someone had done the hard yards and pulled together actual data.

  25. I see Ritchie has decided that this is all wrong and ‘if you take into account tax avoidance’ then the picture is as he said it would be (whatever that was at any moment in time).

    By ‘tax avoidance’ he seems to mean that people either brought forward or postponed income to avoid the 50p rate. Apparently they should not do this as Ritchie says not.

    I don’t think anyone actually knows apart from the people themselves.

  26. If you get paid in shares with deferred vesting, by default you pay income tax on them when they vest, according to their value at that time. But you have the option to pay income tax at the time of the award instead. Perhaps some bankers did this with their 2009-10 awards. Certainly it’s true that reported income in the Additional Rate band was higher that year than in the previous or following years (Chart 5.1).

    If we wanted to do a useful experiment to find the effects of the 50% rate, we’d have to run it for much longer than we have. As it is, all we’ve discovered is the extent to which high earners can bring forward or delay their income.

    Not for the first time, Tim uses an estimate of optimum marginal tax rate from Diamond and Saez which is specific to the USA. Their model has two inputs: the pareto parameter describing the shape of the upper tail of income distributions, and the elasticity parameter describing how taxable income changes with marginal tax rate. Both are different in different countries. I discussed this at some length here.

  27. Frances Coppola has referred us to an excellent summary – not sure whether or not it told me anything that I didn’t already know but it put it all in a clear statement that the average guy can understand (and much better than I should have done) but lots of people persist in ignoring the known facts. Ultra-high tax rates have been shown to reduce tax receipts. If you are better off paying a “tax adviser” than paying tax on your income there is a temptation to do so. The bigger the saving, the bigger the temptation.

  28. While there are other people who rake in more than a million quid a year, they don’t do so in a way that’s taxed as income, because that would be deranged (even for locally domiciled footballers and pop stars, it’d be sensible to pay yourself a year’s worth of party money and leave the rest in your services company).

    There’s actually an apparently genuine scan of Carlos Tevez’s payslip doing the rounds on the internet. His payslip is exactly the same as anyone else’s, except the figures on it an order of magnitude or two higher. But there doesn’t seem to be any special arrangement in place.

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