My Lords, the cost of reducing the additional rate of income tax is estimated at around £100 million per year. This takes account of the significant behavioural response associated with changes in personal tax rates. Details were set out in an HMRC report published alongside Budget 2012. The Government believe that it is not efficient to maintain a tax rate that is ineffective at raising revenue from high earners and risks damaging growth.
Does my noble friend agree that, in a difficult economic environment, maximising tax revenues while avoiding the counterproductive in pursuing it is a huge task which is currently facing all European economies? Does he agree that, following the reduction of the highest rate of tax from 50% to 45%, the number of people in the highest tax category is increasing, and that the revenue generated from the highest-rate taxpayers will increase this year by 57% to over £49 billion? What conclusion does he draw from this?
My Lords, I think that the conclusion I draw is that the Government always have a tricky task in maximising tax revenues, particularly at a time of austerity and when people are looking for tax changes to be fair. In that context, at the same time as the Government reduced this tax rate they introduced changes to stamp duty land tax and anti-avoidance measures on residential property which will raise several times the amount of tax lost from reducing the 50p band.
My Lords, the noble Lord has introduced the issue of avoidance. What is the Treasury’s estimate of the loss of revenue due to bonuses and other payments being held back after the Chancellor provided his friends with such an easy means of tax avoidance by pre-announcing their top-rate tax cut?
My Lords, there is an awful lot of hype about what may or may not be achieved by reducing or retaining the higher rate of tax. HMRC produced its report on the matter last year and estimated that, in the short term, the cost to the Exchequer was £100 million. It said that the “direct yield” from the higher rate,
“might fall over time toward or beyond zero”.
My Lords, the effect of raising the tax threshold is that some 2.7 million low-income earners will be taken out of tax by April 2014 and that 23.6 million individuals will benefit by paying less tax.
Can the Minister explain how it was that he was able to give a very positive answer to his noble friend about, as he described it, the benefits to the Exchequer of reducing the top rate of tax, but that when my noble friend Lord Eatwell asked him a very valid question about people who had deferred taking their bonuses from the high-tax period to the lower-tax period, he said that it was impossible to speculate about it? He understands the benefits but he cannot acknowledge the simple statistic that my noble friend put to him.
The absolutely bald point that lay behind the question of the noble Lord, Lord Eatwell, is that when you do this kind of thing at the top end of tax rates, very well-off people take evasive action. That is why it is an ineffective way of raising additional amounts of money. People do not just sit there and pay the tax: they forestall it, postpone it and avoid it. This is why it was a very ineffective way of trying to raise additional funding.
My Lords, I do not have that figure immediately to hand, but it was very significant. It was more than the potential loss of revenue from reducing the top rate of tax.
My Lords, Colbert famously said that the art of taxation is to raise the maximum of revenue with the minimum of squawking. This Government are raising their revenue with a maximum of purring. Should that not make us suspicious?
My Lords, perhaps I may help. According to the Office for Budget Responsibility, two or three years ago the loss to the Revenue due to anticipation was £1 billion. That was the figure that the OBR gave and it has not been contradicted. When will we know what the degree of postponement is this year? If I may say so, in my opinion both of these losses could have been stopped with a two or three-line clause in the Finance Bill, which both he and I could have written.
My Lords, I think that the noble Lord overestimates my drafting skills.
My Lords, according to this bit of paper the original Question asked “what assessment” the Government have made. As far as I can see, they have made no assessment. Does the noble Lord remember, from whenever he learnt some economics, that economic theory does not tell us anything at all about the optimum rate of tax? This is because people with a greater preference for leisure will work less and pay less tax, if you cut the tax. That is why economics and economists are such a pain in the neck.
My Lords, I could not possibly comment on that last point. I refer the noble Lord, and indeed all other noble Lords, to the extremely comprehensive assessment made by HMRC last year, entitled
The Exchequer effect of the 50 per cent additional rate of income tax
My Lords, the Minister acceded to the point that announcing in advance that tax rates will change leads to a change in people’s habits. Why did the Government give people so long to avoid paying this tax? The proposed spending on facilities for troops returning from Afghanistan, for example, will have to be paid for over a long time. Does the Minister accept that this could be paid for much more quickly if that decision had not been taken?
My Lords, the noble Baroness will remember that the 50p tax rate was introduced by her colleague Gordon Brown during his premiership and that a long period of notice was given. The rate was not introduced by this Government. As far as paying for troops who are coming back from Afghanistan is concerned, that will be paid for out of general revenue, which is the right way of doing it.