I have have a lot of time for the IFS. But that does not mean I have to accept their numbers without question. In particular Newmania, in the comments to my last post has been using the argument that they reckon that a 45% super tax would cost the exchequer money.
The IFS report is here.
They use a research report (dubbed BSS) in all of their estimates. Rather than simply take the headlines as repeated int he press it’s worth looking at the report in some deatil. Especially these bits, which didn’t make the headlines:
However, BSS point out that there is a great deal of uncertainty around this number. First, the paucity of data meant that the authors had to use a relatively simple approach, leading them to describe this estimate as ‘very preliminary’ and ‘tentative’ (BSS, pp. 15 and 18). The elasticity is estimated using changes to top incomes that happened during the 1980s, a period when the top rate of income tax was falling and when income inequality was increasing. This approach may then confuse responses to the policy with any underlying factor increasing income inequality, and this might mean that the estimated elasticity is too high. Furthermore, even if their approach to estimating the parameter was correct, the estimate was based on a small amount of data and is therefore subject to sampling error.
They also have a chart, below. This estimates three different (all possible) estimates of ‘taxable income elasticity’.
Note how on one of their estimates a 50% tax rate would raise over £1bn.
When examining any economic theory it is worth looking at the assumptions, the variables and the possible problems.
The new ‘super’ rate seems to be taking up most of the headlines.
As I said earlier, I think it is just that higher earners pay their share and I think, politically, it is the type of issue I want to fight on.
Doubtlessly the research from the IFS saying it won’t raise much cash will feature prominently from Tories over the next few days.
Working out the likely behaviourial effect from proposed tax changes is a very hard task. Obviously a higher tax will lead to more people trying to evade it.
So, we need to focus on improving tax collection and make evasion harder.
As to the issue that ‘high earners will simply leave the country’… Will they really? Obviously the ultra rich (Philip Green, the Barclay Twins, etc) already have (Monaco mainly). But those earning £150-300k? That mainly work in finance in London? Where will they go?
I know people that earn that much, and they don’t vote Labour!, and I can’t imagine most of them uprooting their lives, moving their kids to a new school and heading off to Zurich or Singapore. I might be wrong. How many people will actually leave? As opposed to just threatening to leave? Seriously.
I will say, for the third time in recent days, we can’t pay back all of this debt by ‘taxing the rich’. But the rich should pay their fair share.
We’ve got a year until this tax comes in. Let’s beef up HMRC’s evasion teams. I imagine there are a fair few unemployed accountants and lawyers we can hire.
Instant reactions here. I obviously have not had time to go through the documents in detail.
Darling’s quote: ‘you can’t deflate your way out of a recession’. I’m glad he gets it, unlike the Irish who are openly aiming to deflate their way out of a recession.
The fact that Darling grasps the potential problem of choking off a recovery by tightening policy to quickly.The Tories will scream and shout about it taking four years to halve the deficit but that is a sensible way to proceed.
The extra £1.7bn to tackle unemployment – especially youth unemployment. I’d have preffered more but this is good stuff.
The commitments on child poverty.
Help for pensioners.
What looks like some dent help for small business.
The intention to raise taxes on the highest earners. Obviously it will not be enough to pay back all of the debt, but they must pay their fair share.
Recognition that the UK has a decent export centre in advanced manufacturing, green tech and communications.
A bit too much direct support for the housing market for my liking. Trying to keep down repossetions and help people stay in their homes is all good and well but getting involved in supporting the mortgage market through buying mortgage backed securities (MBS) smells of trying to support house prices. The problem for first time buyers is not having the (rationally) higher required deposit. This doesn’t help that.
The Potentially Ugly
The 2011 growth forecast look pretty bullish – maybe too bullish. Especially the assumption that consumption will grow 2.25% in 2011 – higher than average of 2000-2006.
Overall – I am reassured that Darling ‘gets’ the nature of the problem. I am reassured that he is targeting resources where they will be effective. I am pleased that we are opening up dividing lines on tax. I don’t think we are doing enough over all. But not as bad as I feared.
But in the meantime, a plea to Sky/the BBC etc. No doubt you’ll do that clever thing you did when broadcasting the PBR and show a live chart of the FTSE whilst Mr Darling is talking. You’ll then ‘measure the reaction of the markets’ as it goes up and down. You’ll ignore the fact that, as of 8.22 this morning, the European stock market is down about 0.40%, US futures are down 1.1% and China was down 4% over night. You’ll also ignore the fact that 30% of the FTSE is dependent on commodity prices rather than government action. You’ll get all excited if the FTSE goes up and even more excited if it falls. Please don’t.
If you must put up a chart, can we please have a chart of UK gilt yields? Where, you know, the price is more dependent upon what the government is actually doing? Pretty please?