Fraser Nelson’s attack on 50p tax rate is full of holes

Our guest writer is Jana Mills

Writing in the Spectator, Fraser Nelson claims that the 50p tax rate, along with other high profile taxes on the wealthy, actually reduces tax revenue from the top percentile. The major piece of evidence he draws on is the table below. Showing the tax liability through income tax shouldered by various deciles of the tax base, he argues that as you reduce the top rate of tax, you actually collect more revenue.

However, as every undergraduate student of the social sciences knows, correlation is not the same as causation, particularly when you fail to take into account all the relevant variables.

It is widely accepted that while incomes have ballooned for top earners in Britain, over the same period, wages at the bottom have stagnated in real terms. It is not surprising, then, that the tax liability of the top 10 per cent has gone up as a percentage over the same period while their incomes have risen in relation to the bottom 50 per cent.

Quite apart from this most basic statistical sin, the presentation of the table is, on further inspection, equally problematic.

Why is there an unexplained 40 per cent of the tax base missing for the last two time periods? Why don’t the periods referenced follow a predictable pattern? There first two periods are adjacent, the following contains a 2-year gap, followed by gaps of four, 12 and eight years.

The percentage liability did not appear to change after the top rate was cut from 83 per cent to 60 per cent, which no doubt Nelson will argue is as a result of lag which is implicit in his theory. However, revenues did seem to jump immediately on the reduction to the 40 per cent rate, according to his table at least, though the full set of figures may present a different picture.

There is another wild assumption which Nelson adds to support the idea that the 50 per cent tax rate will create a regressive tax situation potentially far worse as the capital class is more mobile. Rather than state his case simply, he cannot resist further statistical stupidity, claiming that:

“… [as] one third of Londoners are immigrants, we can expect the nationality of the super rich to be around this ratio.”

By this logic, I may well claim that as “one third of Londoners are immigrants”, we can expect the nationality of Starbucks Batistas, Tottenham Footballers and Investment Bankers to be of the same order.