Fraser Nelson is wrong on the 50p tax rate

Tuesday’s Public Sector Borrowing figures came in ahead of expectations, driven by bumper income tax receipts.

Over at the Guardian website I argued that this partially represented the impact of the 50p rate:

“Last week’s labour market statistics showed that there had been no improvement in the overall labour market with the percentage of people aged 16 to 64 in work being static at 70.5 per cent between December 2009 and December 2010. The same report said that average weekly earnings had grown by only 1.1% over the past year.

“So we have a mystery – the number of people in work is fairly constant, earnings have only increased by 1.1% and NICs [National Insurance Contributions] are only up by 4.4% and yet income tax revenues are up by nearly 18%.

“The most likely explanation is that higher income tax receipts partially represent the new 50p rate kicking in and rasing revenue. How else to explain the figures? Receipts are up way in advance of earnings or employment growth.”

Chris Dillow, on the Investors’ Chronicle website, wrote:

“The biggest reason for this is that income tax revenues are booming. The OBR predicted that they would rise 3.1 per cent this year. In fact, they are up by eight per cent, bringing in an unexpected £5.6bn for the Treasury.

“This hasn’t happened because the labour market has been stronger than the OBR expected. If this were the case, national insurance contributions would also have exceeded expectations, but in fact they have been the one major revenue source to have undershot their prediction; VAT and corporation tax are slightly ahead of forecast.

“So, what’s happened? One reason is that bankers’ bonuses have been unusually large. The other, more intriguing one, is that the rise in the top rate of tax, far from causing an exit of high-earners, has in fact raised revenues because we are on the upward-sloping part of the Laffer curve where higher taxes really do bring in more revenue.”

Over at the Spectator Coffee House blog, Fraser Nelson was quick to claim that this was not the case:

“A jubilant John Rentoul has just tweeted:

‘Where is Fraser Nelson when you need him? The 50p income tax rate has brought in a ton of money. He said it would probably reduce revenue.’

“He is absolutely right – but not for the reasons he thinks. Were John self-employed, he’d know that the tax paid last month was in respect of the 2009-10 tax year – when the top rate of tax was 40p.

“Of course, many of the super-rich are on PAYE – but that has happened since last April. It doesn’t explain a January uplift.”

This point has since been echoed by the TaxPayers’ Alliance, the Adam Smith Institute and Tory bloggers.

There are two problems with this explaintion. First that it does not explain why income tax receipts have increased in advance of earnings or employment growth each month since April 2010 (when the 50p rate was introduced) and second that it is factually wrong.

Fraser Nelson appears confused about how self assesment actually works. Had he consulted the HMRC guidance before writing his post, this confusion could have been avoided:

“You’ll usually have to make ‘payments on account’ of the current year’s tax. You’ll have to make two payments, one by 31 January in the current year and the other by the following 31 July. Each payment is half of the tax due for the previous year.

“For example, for the tax year 2010-11 (6 April 2010 to 5 April 2011) the first payment on account will be due on 31 January 2011. The second payment on account will be due on 31 July 2011.”

In other words, self assessment payments received in January did include tax receipts related to the year 2010/11 and hence a 50p effect.