I do like to see a good kicking me, I really do

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?

But apparently he doesn\’t.

16 thoughts on “I do like to see a good kicking me, I really do”

  1. I thought that the marginal rate over £100K was actually 60% (or some such figure) as a result of the withdrawal of allowances (again not exactly sure how it works)? I’m sure I saw a graph somewhere showing the effective marginal rate was 40% up to 100K, then jumps to 60ish as far as 120kish, then back to 40% then 50% over 150K.

    Edit – a few details here: http://blogs.telegraph.co.uk/finance/ianmcowie/100011110/squeezed-middle-pay-higher-tax-rates-than-millionaires/

  2. I can now see why he usually keeps his workings hidden when claiming that the 50p tax raises nearly £5bn.

  3. Hold on..

    The 50% crew pay £47bn of income tax.. and the first £16.3bn is nowt to do with the 50% rate?

    So the other £30.7bn is the tax collected by the 50% bracket.

    If the 50% bracket were a 40% bracket then that figure would be reduced by 20%, not 10%.. which means that the rate is picking up an extra £6.1bn.

    Now… that doesn’t explain what RM has done, and it obviously entirely misses the point of those who would say that it’s the income which, now, is *not* taxed which is the issue.

    But.. unless I’m missing something silly (always a possibility) I don’t see what the CPS chap is blathering on about… his own maths is beyond shonky, and his then using that to make an assumption about what RM has done, and so everyone is drawing the most unflattering conclusion possible.

  4. It would been even better if there was someone else on the box telling people this instead of just letting themselves get walked on by Banality Murphy.

  5. Johnson, no because the easiest lie to get away with on TV is the big lie. Refuting it is long and boring (e.g. see answers above).

  6. 🙁

    If only there was a hero who could save us from this menace. Maybe someone who writes for Forbes…

  7. OK, right, I’ve read it again and again… and the guy who wrote it is a moron. He’s made a basic error himself, and from that drawn a conclusion about what RM has done.

    He says that the £4.7bn must be 10% of the £47bn. That’s not just wrong because of how tax works, it’s wrong because you’d need to take 20% of the £47bn to get the number you want.

    I’m quite sure that if RM posted his workings we could all find ways to tell him he’s wrong and call him an idiot. But he’s probably not wrong for the reasons that y’all think he’s wrong.. and it just goes to show that retired acocuntants from Wandsworth aren’t the only people who don’t always check their workings.

    Or do some of you seriously think that RM would make a basic mathematical error which leads a massive understatment of a figure which he would, quite obviously, prefer to see overstated.

    (apologies for partial repeating of earlier comment)

  8. Following on from TTG, I’m sorry to say Richie is (naively) right here. If you look at this official HMRC table you will see they estimate that additional rate tax payers will provide an aggregate £23.3bn in tax revenue from that band, and 20% of that is (roughly)

    Of course the whole argument is that this money would be recuperated in other, very difficult to measure ways.

  9. If you look at Table 2.6 (p.38) of ‘Income Tax Liabilities’ released by HMRC on 28th January, 2011, you’ll see that ‘Additional Rate’ taxpayers are projected to pay 23,300M pounds in Additional Rate Tax On Earnings in 2010-2011. That’s at 50p in the pound.

    So if the ‘Additional Rate’ were to revert to the (40p) ‘Higher Rate’ – a 20% drop – that would amount to a fall of 4,660M pounds.

    I suspect that this is how “the Left’s favourite tax expert” arrived at his figure.

    In your piece, you write “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?”

    For my part, I really would hope that someone who launches an attack on a respected expert in the field of tax might pause to check his own reasoning before leaping to the conclusion that said expert was an idiot.

    May I suggest that the honourable thing to do now would be to replace your post with an equally prominent apology to said expert.

  10. PaulB: No. What’s unambiguous is that the GBP23.3B refers to the amount of tax liability incurred by Additional Rate payers on their income in excess of GBP150K. Look at Table 2.6. Figures are also given for such taxpayers’ liabilities under the Basic and Higher rates (GBP2B and GBP11.1B respectively). The GBP23.3B figure

  11. Paul: Murphy wrote

    They’re expected to have total taxable income between them of about £47 billion. So the tax – which is an extra 10% over and above the 40% rate previously applying should raise nearly £5 billion a year.

    £47 billion is the total tax liability of additional rate taxpayers in 2011-12, in the table Murphy links to.

    So you are right, on the single proviso that when Murphy writes “so” he means “ignoring the data I’m giving you and doing a calculation on different data in a different table for a different year”.

  12. A remarkable post from the same group who worked out that parking restrictions in London would cost the economy a trillion pounds, or something like that. I see they’ve removed this one.

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