Duncan’s Economic Blog

50% Again/the IFS

Posted in Uncategorized by duncanseconomicblog on April 22, 2009

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.


10 Responses

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  1. newmania said, on April 22, 2009 at 8:11 pm

    Aha the Brown arachnid at his spinning . Would you say this was an unusually uncertain prediction ? I trust not It is unusually certain and the grace notes and cautionary notes are what you would expect , I wonder if we will see this sort of misleading material used out of context , ( very New Labour ). It does not address the effect on wealth creation which must amplify the negative effect , after all Duncan why not a 90% tax on earnings over £150,000 ? Why not take all of it ?
    I am actually horrified at the potential for loss of revenue your chart reveals ,.New Labour`s predictions of revenue have been consistently dreadfully optimistic which leads me to suspect that tax avoidance is more , not less important than it was . The IFS might be wrong in the other direction and we could be throwing billions away. Overall I`d say neutral at best . I have watched various opiniers and I think there is almost universal agreement that this is a purely political gesture and one that hopes to obscure the true scale of the problem and the tax rises to come . You are lonely and tragic figure kicking a can along the gutter whistling …

    Losing Labour administrations always return to class war .

    • duncanseconomicblog said, on April 22, 2009 at 9:35 pm

      I tend to question all economic arguments. You talk of using evidence out of context, I point out that the IFS gave three different estimates – the press quoted one.

      It’s not class war to raise taxes on the top one per cent!

      And yes, taxes are going to rise for everybody.

      If these proposals are so awful I presume Osborne will reverse them?

  2. VinoS said, on April 22, 2009 at 9:19 pm

    Newmania, i see you can’t engage with the actual content [probably goes above your head] so you call people ‘arachnids’. The only arachnids I can see are those devious city boys who have been engaging in dodgy financial dealings and tax evasion and who are now concerned that they might be a crack down on tax avoidance and an increase in their top rate.

    As Duncan pointed out, it is highly unlikely that people will uproot themselves and their families and leave in reaction to the tax rate. It is a pure myth. And, to a great degree, even if they leave then it is no big loss to the country as a whole. Someone else, more junior in the heirachy at their firm, will just take on their old job.

    You really are sounding like a broken record – repeating right-wing propaganda and not engaging intellectually with the graphs and other information provided. I fear Duncan is casting pearls before swine.

  3. newmania said, on April 23, 2009 at 6:27 am

    Only kidding Vino oink oink , its not just this report Duncan its a consistent line and I see for all your protestations you have good the point really .

  4. VinoS said, on April 23, 2009 at 6:45 am

    Am not quite sure what newmania is on about above, as comment 4 seems rather incoherent.

    On the broader issue, it is worth noting in the graph above that there are a variety of different estimates given of the elasticity of income [i.e. the degree to which people’s incomes may reduce if their taxes rise]. The 45% tax rate would only cause a fall in revenue if income elasticity was 0.46 or 0.59. These are very high figures and assume that a £1 rise in tax will mean people will reduce how much they earn by 46p or 59p. I would be surprised if people’s incomes were that elastic. After all, there are hardly going to be people around saying “Oh, I won’t accept a salary of £200k, I only want £149k” just because of the higher top tax rate. There is also a substitution effect with taxes – people may work more to earn the same net income if a tax change means they would get less net income on the same gross pay.

  5. VinoS said, on April 23, 2009 at 6:46 am

    Further to my last comment, has anyone done any calculations on what the income elasticity is in reality? And how this plays out in practice?

  6. newmania said, on April 23, 2009 at 8:52 am

    Vino , can offer a little free life coaching, stop being prat , you will experience immediate benefits . Briefly the line taken by the IFS is consistent not just over this report and the various statements of Robert Chote over several studies bear that out . Anyone can speculate but not with authority so what’s the point . I am yet to hear anyone who takes Brown`s claims seriously either on this or the prospects for growth .
    Rather more important the cost of the tax is the effect on wealth creation and the prospect of levying meaningful taxes far lower down the income scale I am rather more interested , at the moment where the cuts are coming from . “Efficiency?” Just how inefficient have we been all these years ? There is a striking claim in the Guardian that the spending constraints are tighter than in the Thatcher period . Smells like New Labour spin to me .

  7. VinoS said, on April 23, 2009 at 3:29 pm

    Newmania, i think you are the one who should stop being a prat. You are obviously ignorant and so abuse people rather than explaining what you think and why.

    Anyhow, back to the serious point, is there any evidence for a high level of income elasticity? I find it highly unlikely that people will want to reduce their gross income by much iif their taxes go up – since this will doubly reduce their net income.

    • duncanseconomicblog said, on April 23, 2009 at 3:32 pm

      Keep it civil boys 🙂

  8. VinoS said, on April 23, 2009 at 5:27 pm

    Fair enough. Good luck for your appearance on sky this evening…..

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