Well done Ritchie, well done

Don’t we rather expect an accountant to be able to count?

This argument makes no sense at all. It is true that latest estimates (not data) suggest that those with the highest incomes will have paid more than £8 billion more in 2013/14 when compared to 2012/13 but let’s be clear why. They were told that if they delayed their income from March 2013 until sometime in April 2013 the tax rate would fall by 5%, and so they did just that. And as a result income was understated in 2012/13 and overstated in 20913/14. Official estimates show there is no expectation that this pattern should recur and of course there is not. This is a not a phenomena of the tax rate; it is a phenomena of the change in rate.

If in doubt, note that when the rate was introduced £16 to £18 billion of income was shifted, producing the almost exact opposite effect.

£18 billion shift in income. OK, equal and opposite effect. And the difference in tax rate is 5 p in the pound, or 5%. And 5% of £18 billion is £0.9 billion. Yet the rise in tax paid is £8 billion, some nine times the effect of income shifting.

So, given the numbers that Ritchie himself is using we’d probably come to the conclusion that while income shifting is indeed a thing it cannot explain the effect we’re seeing. Meaning that we might actually want to ascribe this to Laffer Effects.

As we might well do in fact. If we check the Diamond and Saez paper on the peak of the Laffer Curve again then we get a 54% tax upon income (note, tax upon income, including NI, employers’ NI) as the peak of the curve in a system with allowances. Allowances here meaning things like a different capital gains rate, investment tax breaks, the ability to change residence and thus tax jurisdiction and so on.

Hmm, theory and empirics meeting. How unusual that is in economics! And how obvious of Ritchie still to be on the wrong side of it.

21 thoughts on “Well done Ritchie, well done”

  1. Tim,
    The change in the tax paid *during the year* is tax rate times income shifted not (changein tax rate) times income shifted.
    So 45% x income shift
    But the key point is that Osborne’s claim of an £8bn increase in tax between years comes with an estimate of £6.25m income shift so a boost of £2.8bn in 2013-4 following £3.125bn cut in 2012-3 leaving a net gain of £2bn after adjusting for the effect of the shift.
    Murphy’s £16bn is made up to pretend there’s no gain – and he’s made a bloomer by forgetting that the apparent inter-year growth would be 95% of the amounted shifted not 50%.

  2. So I’m wrong but Ritchie is also wrong? I can live with that. Would be terrible if he was actually right on something.

  3. The 16-18bn figure for forestalling in 2009-10 comes from an HMRC report written in 2012. The £6.25bn of delayed income in 2013-14 John77 quotes is a guess from the same report. We have no information about the actual amount of delayed income.

    The optimum tax rate from the formula in the Diamond and Saez paper depends on elasticity of taxable income and on a parameter describing the shape of the income distribution. The appropriate values for these parameters, which D&S do not claim to know with any accuracy in the US, are sure to be different in the UK. It’s hopeless to treat the 54% estimate as saying anything precise about revenue-maximising tax rates in the UK.

  4. @ Tim,
    I wonder if he is deliberately setting up distraction errors so that you will spot them and then overlook the one he’s trying to slip past you

  5. @ SJW
    Actually the figure I quote comes from the FT. I don’t have room in my study to hold four years of out-of-date commentaries.
    Also,according to the FT “In 2013-14, 4.2m higher-rate taxpayers accounted for 37 per cent of tax while additional-rate taxpayers accounted for 28 per cent of the total. In 2010-11, 3m higher-rate taxpayers accounted for 31 per cent of tax revenues while additional-rate taxpayers accounted for 23 per cent of tax.”
    Two-thirds of tax is paid by the relative small, but growing, minority who pay higher-rate or additional-rate tax.

  6. The man thinks “phenomena” is singular. He also seems to think it means “consequence”. Hanging’s too good for him.

    P.S. I use the term “man” loosely.

  7. @John77
    “Actually the figure I quote comes from the FT. I don’t have room in my study to hold four years of out-of-date commentaries.”

    My study is crammed with guitars and Matchbox cars. Hearing that yours has actual work stuff in it make me feel somehow childish.

    I’m off to brrrm my hot pink lamborghini countach around my desk til the feeling passes.

  8. Likely to see a similar change from 15/16 to 16/17 in respect of the increased dividend tax rates.

  9. Wouldn’t it be nice to have a year without politicians meddling with the tax code, so that we could establish some kind of baseline? Perhaps that is why it never happens.

    Osborne has done so much to pull tax payments forwards that he is going to feel the pain if the economy slows this year, and prepaid tax has to be repaid. But the pain will fall next financial year, when the returns arrive. Trust politicians to make an anarchic mess.

  10. On the other hand, there will be a counter balancing effect of increased pension contributions…

  11. As he denies the existence of the Laffer Curve

    A lot of economic theory is hand-waving and sociology, and two rational and reasonable economists may come to differing conclusions. But Laffer’s argument follows directly from a very basic result in calculus, called the Extreme value theorem. If this were not, in fact, true, we’d have to rewrite a large amount of mathematics …

  12. But the concept of their potentially being a revenue maximising rate works quite well on napkins.

  13. @SJW

    A little knowledge … If there’s no interior maximum, the maximum must lie at either 0% or 100% tax. Clearly the former raises zero tax, and the latter something very close, since no-one will choose to work (though I suppose a few could be encouraged by guards equipped with machine guns). No sensible person believes this to be the case.

  14. “Mathematics does not demand that there be an interior maximum. And if there is, it could be at a rate very close to 100%.”

    “Could”. Hmmm.
    But IS it? Do we really want to go to the wall for “could”?
    And do we in any case actually wish to maximise the take?

  15. @ SJW
    Your claim about CM rewriting of mathematics is ridiculous. He is merely stating a *logical* (not even mathematical) fact – either there is an internal maximum or there is not. If there is, then Laffer is right, If there is not then the maximum tax take is either zero or one that leaves the taxpayer with zero income.

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