Mr. Murphy really does come out with some unbelievable statements:
There is however considerable concern that over very small bands of income the top marginal rate of income tax in the UK will in 2011 be 60% about which they say this:
raises the concern as to whether the projected increased revenue will materialise
Or in other words they raise the implicit threat that they will seek to subvert the will of Parliament through tax avoidance.
Umm, no, that\’s not actually what is being said.
We know very well that tax rates change peoples\’ behaviour. That\’s why we stick taxes on fags and booze: so as to change peoples\’ behaviour. That\’s why we tax petrol so highly, why we levy potential taxes upon criminal behaviour (the expected cost of breaking the law is the likelihood that you\’ll get caught times the fine or gaol sentence you\’ll pay if and when you are).
We know absolutely that taxation changes behaviour.
Now, it is true, that it depends upon which tax and which behaviour. I\’d wager that you could stick a £100 a shag tax on married couples and that…. well , actually, with married couples maybe behaviour would change. On unmarried couples then, and would the number of hook ups change all that much?
Or you could tax unmarried hook ups as Saudi Arabia does, with the death penalty. That they do actually execute people for this shows that the tax, while I assume that it reduces such behaviour, doesn\’t make it extinct.
Or we could look at economic activity. We know that, as Richard Layard has pointed out ad nauseam, that if you subsidise something like unemployment then you will get more of it. If you tax something, like work, you will get less of it.
Now with work it gets a little more complex, because there are two effects. People tend to have a minimum income that they will work all hours to get to. Above that, they\’re happy enough to trade leisure for income. Sticking a tax in there has different effects dependent upon whether they have reached this minimum or not.
A tax on income will, for those below their required minimum, lead to more working for money. For those over it, it will lead to greater consumption of leisure and less working for money.
Now, having set the scene,. we have Ritchie\’s assertion. That if marginal tax rates go to 60%, then any shortfall in tax collected, from the projection of unchanged behaviour, must be because people engage in tax avoidance.
What, like a 60% marginal tax rate might not cause some people to preferentially choose leisure to those extra hours in the office? This is now tax avoidance?
Playing with the kids instead of burning the candle at both ends? This is subverting the will of Parliament?
Now, it is true that the effect of 60% marginal rates is unknown. It could be that those affected by these higher rates, the already high earners, will work harder. It\’s also true that in reality, some will and some won\’t. The effect upon tax revenues is determined by how many do and how many don\’t. No, I don\’t know any better than you do.
But I am absolutely certain that people deciding their own work life balance in the face of changed marginal tax rates is not evidence of tax avoidance nor is it evidence of subverting the will of Parliament.
Unlike Richard Murphy. The man really is a fool, isn\’t he?
Has he never heard of dynamic analysis of tax rate changes? Or think it all to be some right wing plot?