The Left’s favourite tax expert Richard Murphy appeared across the airwaves yesterday to discuss this issue. Richard has carved a niche for himself as an independent tax accountant who contributes widely to our public discourse.
Unsurprisingly, he was asked to appear on a variety of media outlets yesterday to defend the 50p rate. This in itself is an honourable position. But he repeated claims made in his blog that the 50p rate was actually raising £4.7 billion – far more than the Treasury and HMRC have estimated.
How had he got to this figure?
I accessed HMRC’s income tax liabilities by taxpayer marginal rate table for 2011-12. Sure enough, it says that additional rate taxpayers (the top 1% earning over £150,000) are liable for a total of £47 billion in tax (28% of total income tax revenues). Therefore it seems that Richard has just assumed that lowering the tax rate from 50% to 40% would be equivalent to reducing their tax liability by 10 percentage points, or £4.7 billion.
This is not how our tax system works. In fact, people earning over £150k don’t pay 50% of their income in tax. The 50% rate means that any income you earn over £150,000 is taxed at 50% – it’s what economists call a marginal rate.
To see what I mean, I’d urge all of you to play around with the excellent UK PAYE Income Tax Calculator. It shows that someone earning £150,001 pays:
20% on the first £35,000 they earn = £7,000
40% on all income between £35,000 and £150,000 (i.e. £115,000) = £46,000
50% on the final £1 = £0.50
Therefore, a total income tax bill of £53,000.50
This means that Richard has overestimated the revenue that the 50p rate brings in, because it doesn’t apply to the first £150,000 of any one of these people’s income. In other words, all income revenue tax paid by those in the 50% rate band below £150,000 is completely unaffected by the change in rate. Given that there are 308,000 additional rate payers and each pays £53,000 in tax before reaching the £150,000 threshold where the 50% rate kicks in, £16.3 billion of the revenues collected from the richest 1% have nothing to do with the 50% rate.
You really would hope that the man who wants to rewrite the entire global financial system knew the difference between a marginal and average tax rate, wouldn\’t you?