Today\’s example of Ritchielogic

When the 50% income tax rate was introduced in April 2010 we know that its introduction was accompanied by massive tax abuse, with income being shifted from the 2010-11 tax year into 2009-10. HMRC estimate around £18 billion was moved between years to save tax.

OK.

As is reported this morning, as the end of the 50% tax era approaches companies are thinking hard about delaying income payments to achieve the same tax saving result for their employees.

If you say so.

And in the process all the absurd calculations on Laffer effects offered by HM Treasury in 2012 need to be revisited: it is very obvious that these embraced an implicit assumption that the behaviour would not be noted. When that assumption is changed then so does so the so called Laffer effect.

I\’m sorry. What?

The proof that people change their behaviour dependent upon tax rates is to be used to deny the Laffer Curve, that people change their behaviour dependent upon tax rates?

Eh?

13 thoughts on “Today\’s example of Ritchielogic”

  1. But Richie is talking about income being shifted into a different tax year in order to take advantage (or offset the disadvantage) of changes in tax bands. That’s surely a different argument from the “laffer curve” argument which is about the longer term changes in behaviour caused by higher tax rates per se rather than taking short term advantage of changes to the tax rate, which can happen when tax rates go up or down.

  2. TBF I think one could argue that the calculations on the actual Laffer Curve would be different if one was to exclude easy ways of changing income such as this shifting across years. However, it should be noted that some income is not adjusted in the short run, but in the longer term people would find new ways to avoid egregiously high tax rates and that these would spread. No idea about the relative impact of these two effects.

  3. He’s wrong, actually. HMT has already recalculated based upon estimates of reverse forestalling in 2012-13 and 2013-14. See p.111 of the March 2012 Economic Forecast:

    http://cdn.budgetresponsibility.independent.gov.uk/March-2012-EFO.pdf

    HMT think the Laffer peak for lies somewhere between 45p and 50p:

    “….45 and 50 per cent are
    very close and either side of the implied revenue-maximising additional rate.”

    I’m not sure why he thinks reverse forestalling indicates that the Laffer curve has changed shape. On the contrary, reverse forestalling to the extent that HMT predict in this forecast would indicate that people are behaving exactly as they did before. Just as they avoided tax by forestalling in 2009-10, so they are now planning to avoid tax by reverse forestalling in 2012-13 and 2013-14. The Laffer effect is exactly the same.

    If anyone is interested, I wrote about this a while ago:

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

  4. Having now read Murphy’s post, I think there is another explanation. I think he may mean that because of all the tax campaigning, high earners may actually reduce their planned forestalling. If that happened, then HMT’s estimates of the forestalling effect would be too high and the Laffer peak would effectively be higher as he suggests. I’ve commented, and it’ll be interesting to see what he says.

  5. > HMRC estimate around £18 billion was moved between years to save tax.

    I’d never reflected.

    Is this another GB “get it in before the Election” manipulation?

    They really should have killed that 50p tax rate on day 1.

  6. I can now confirm that my second comment is correct. He is suggesting that there will be less reverse forestalling than HMT’s estimates because of all the tax campaigning. If he is right, then Tim is wrong – the Laffer curve will indeed have moved to the right. We will have to wait for some real figures. Appointment now in my diary for further discussion of this subject at the same time next year.

    Matt, yes it was exactly that. But then so is this, though done rather more craftily. Gideon is more subtle than Gordo.

  7. Frances,

    I’m not sure. As I said above, forestalling (or reverse forestalling) is a way of using changes in the rate of tax to one’s short term advantage and can apply regardless of the direction of the change. Surely that’s a different thing to the “laffer” effect which relates to how people’s behaviour changes in response to higher tax rates in the longer term (ie assuming the rate stays constant over a certain period of time).

  8. Andrew,

    The 45p rate (we assume) is a long-term change, not a temporary tax cut. If people won’t avoid it now then it is reasonable to assume they won’t avoid it later either. So the Laffer curve peak has moved to the right.

  9. Andrew,

    The Laffer Curve is something that shows the results of how people react to taxes. But its based on the premise that people change their behaviour according to taxes. So forestalling back or forth is proof that people change their behaviour according to taxes. Therefore the Laffer curve exists.

  10. The Laffer curve exists because some single individual in the whole group exposed to tax will not bother to work that extra hour if he (yes, he) will get no reward from it. So a 100% tax rate collects less than 99%. There is room for debate about the peak of the Laffer curve, but not about its existence.
    I said he because (i) overtime is overwhelmingly worked by men (ii) the jobs which are carried out for the benefit of humanity rather than pay are (except for the priesthood) occupied largely by women (until last month my wife’s salary was less than my pension from 22 years in my first post-graduate job – it still does not match my total pension entitlement – despite her two degrees and years of experience. She was headhunted while working unpaid for a local charity.) (iii) it is usually father-breadwinners who do the extra hour to make ends meet (I was once told by a friend that the job interview at his employer was “Are you married? Do you have a mortgage? Two “yeses” got a “Right!” because they knew the guys would put in the effort and, when needed, the overtime)

  11. I’ve read Frances’ explanation, but I still have no idea what Murphy meant by “…an implicit assumption that the behaviour would not be noted”.

    Unfortunately for Murphy, he has no credibility whatever on this issue, because the calculation he published in March was out by £5bn, and he was unable to acknowledge the error even when it was carefully (and politely) pointed out to him.

    There are various influences on elasticity of taxable income; not everyone includes the same ones when they speak of a “Laffer Effect”

    1) employing avoidance techniques to reduce taxable income
    2) bringing forward income in anticipation of a tax rise, or deferring it in anticipation of a fall
    3) relocating to a different tax regime
    4) reducing income by doing less work, in view of the reduced rewards when tax rates rise
    5) increasing income by doing more work, so as to maintain net income when tax rates rise

    Note that (3) will take place only gradually – not many will up sticks overnight in response to a tax increase; rather more will find overseas job opportunities relatively attractive as they arise.

    (4) is the classical Laffer Effect john77 writes about.

    I think it highly optimistic of HMRC to think it can place the peak of the Laffer Curve within a 5% band from the data available.

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