Making a Mantrap out of a Molehill

A lot has been written about George Osborne’s 2012 Budget. Was it a tax giveaway to Osborne, Cameron, their millionaire Cabinet colleagues and their plutocratic pals? That was certainly the initial line of attack taken by Ed Miliband (ignoring the large number of low earners who were having their taxes cut by raising the personal allowance). Or was it an assault on pensioners by means of a Grannytax reducing the age-related personal allowance ahead of abolishing it entirely for future pensioners (ignoring that the State Pension had been raised by more than the cost of the extra tax payable for most affected pensioners)?

I suspect that the most significant aspect of the Budget is one which has not really been remarked upon. So, here follows a little guesswork and crystal ball gazing. As Peter Snow used to say during Election Night computer simulations, just a bit of fun. I have form in giving Osborne too much credit in terms of the thinking he has put into his announcements by assuming that the original decision to remove Child Benefits from all families with a single higher rate tax payer had been thought through. So I could be completely wrong.

The mantrap in question in my title is in the form of the reduction of the supplementary rate of income tax for earners of over £150k from 50p to 45p. This attracted scorn from pretty much all corners. Many Conservatives thought that the rate should have been abolished entirely and would have been but for the inconvenience of the LibDem coalition partners. Labour, despite having spent only 37 days out of the 13 years they were in power with a 50p top rate, immediately used it to attack the government for pandering to the very richest in society. Even the LibDems could only say that they had managed to secure some concessions by retaining a rate above 40p for the richest and increased property taxes for the most expensive properties (and some strengthening of anti-avoidance measures).

So, why did Osborne do this? Why guarantee a range of hostile headlines across the whole spectrum of opinion? I mean almost literally guarantee as the reduction in the 50p rate was one of many aspects of the Budget to have been leaked. The changes to tax for pensioners on the other hand, weren’t leaked. So Osborne got hammered on millionaires by Miliband and grannybashing by the Mail and Express the next morning. Ineptitude (as with the initial Child Benefit announcement)? Or very low cunning?

I think it was a move of dastardliness.

One of the reasons given for reducing the 50p rate was that it had in fact led to a much lower amount of tax being collected than anticipated. Wealthy people had simply taken avoidance measures which meant that the rate was largely symbolic. Unlike, perhaps, David Cameron, with his love of “nudge” theory and the Big Society, Osborne does not appear to be one for symbolism. He appears to incline, as do I, more towards thinking of tax as principally being a mechanism for raising the money the state needs to do the functions the public expects of it rather than as a way of expressing or motivating moral attitudes and behaviours (a distinction more elegantly expressed by John Redwood here).

So, the logical thing to do is to look to how to get more money from rich people generally rather than to worry about how it might look if the totemic 50p rate being cut were to be the means to achieve this. This is precisely the justification given by Osborne for reducing the rate from 50p to 45p.

So far, so unexciting, much less dastardly! You might ask, “but how can anyone know that 45p will work, it’s just a shot in the dark, an expensive gamble where the only winners are millionaires?”.

The Mantrap – Or, the Casino Always Wins

In setting the scene for the reduction to 45p, Osborne relied on the official figures for the revenue raised by the 50p rate. These figures are only available for 2010-11, the first year in which the 50p rate was effective. They showed that the tax had raised rather less than intended. Astute commentators pointed out that this was unsurprising as the wealthy had had enough forewarning of the 50p rate coming in to enable them to take more income during 2009-10 (and of course that many of those earning over £150k a year had the sorts of occupations or controlling stakes in businesses which meant that they were able to do this).

The cunning part is that this is precisely what is likely to happen in respect of the 45p rate, but in reverse. As the 45p rate is due to come into effect in 2013, wealthy people who are currently subject to the 50p rate can work on deferring parts of their 2012-13 income to 2013-14. If done, and there’s little reason to suspect that it would not be, this will have the effect of inflating the amount of tax raised by the new 45p rate in 2013-14 and depressing the amount of tax raised by the 50p rate in 2012-13. Cutting to 45p rather than completely abolishing the supplementary rate also means that there will be clear data allowing comparison between how much was raised at each rate, whereas further calculations would need to be done to work that out if Osborne had gone for straigth abolition. Such calculations would be contested and the whole thing would be too boring for the general public to get.

And, the geniusish part for the Chancellor is that this nice hard economic data will be delivered to him just in time for the 2015 Budget, which will be just before the calling of the next General Election. So, a matter of days before the General Election campaign, the Chancellor will be able to say that the cut to the 50p rate derided by Miliband as a gift to millionaires raised billions of pounds of extra revenue. That cutting taxes was something that was good not only for individuals and businesses, but also for the health of the public finances and the money available to pay for public services.

Economic and Political Alchemy

It would look (to those not looking too carefully at the reason for the rise in the tax take- ie almost everyone who will rely on the soundbites of a campaign) like Osborne had found the Philosopher’s Stone and that Labour were just wrong. Particularly if Osborne uses the fruits of the 45p rate to raise the personal allowances for all tax payers beyond £10k. If the 2016-17 personal allowance went to a level that was higher than where the age-related allowances he abolished would have got to had they risen as the generally had in previous years, a single, hotly criticised tax cut to millionaires would have had apparently magical power. It would have done more than the LibDems had trumpeted as being one of their key aims for the coalition (a £10k personal tax allowance). It would have simplified the tax system so that everyone had the same tax free allowance. It would have meant that full time workers on the National Minimum Wage were taken out of tax completely. And it would have made 2012’s Granny Tax and Millionaire’s Friend headlines look very short-sighted.

Now, I’m not saying that this is necessarily what will happen. There’s a lot that could stand in its way, not least the economy failing to bump along even at the rather anaemic levels currently predicted and a giveaway quite as big as the one sketched in the paragraph above would need better growth than that. It would certainly be very dangerous if the Chancellor then used it as the basis for future tax cuts without spending cuts – a Tory equivalent to Brown’s boast of abolishing boom and bust.

But it could just be a fine piece of politics to throw Labour off its high horse just before the next election.