MSP – yes. Interesting to note his admission that gap between now and introduction will lead to loss of revenue (cant remember exact number) as people avoid tax in next 12 month.
OBR:
As discussed further in Box 4.2, a key driver of this shortfall is lower-than-expected revenue from the 50 per cent additional rate of income tax introduced in April 2010.
Estimating the size of such behavioural responses is very difficult, especially for high- income individuals who are likely to be more willing and able to alter their working lives and financial arrangements in response to tax changes than the bulk of the population. The overall size of the behavioural response can be captured by estimating the Taxable Income Elasticity (TIE), the overall responsiveness of total taxable incomes to changes in marginal tax rates. The March 2010 costing used a TIE of 0.35, implying that the introduction of the 50 per cent rate would cut the total taxable income of the affected taxpayers by 5.9 per cent.
HMRC have now undertaken the first ex post analysis of the 50 per cent yield, based on 2010-11 self-assessment tax returns. One striking finding is that high-income individuals appear to have shifted at least £16 billion of income that would have been taxed in future years into 2009-10 so that it would be taxed at 40 per cent rather than 50 per cent. This has a one-off cost to the Exchequer of around £1 billion. The scale of forestalling, which was not factored into the March 2010 Budget costing at all, illustrates how willing and able high-income individuals are to adjust their behaviour in response to changes in tax rates.
Using a methodology broadly consistent with that of Brewer et al, and adjusting for forestalling, the HMRC study also suggests that the underlying behavioural response to the 50 per cent rate has been more powerful than the March 2010 Budget costing suggested. It points to a TIE around or above the Brewer et al level and significantly higher than 0.35. In its costing of the move to a 45 per cent rate, the Government has assumed a TIE of 0.45 – broadly in line with the Brewer et al estimate. We believe that this is a reasonable and central estimate, both for the costing and for our underlying forecast. Taken at face value the HMRC study might suggest an even higher TIE, but this would risk placing put too much weight on a single year’s outturn evidence – especially given the complications from disentangling the forestalling effect. There is also reason to believe that the behavioural response to the cut in the tax rate may be smaller than to the increase, because of the costs involved in swiftly reversing expensive decisions on retirement, migration, tax planning and evasion. But it is very important to emphasise the significant uncertainties around all such estimates.
