It's easier to tax pensioners than rockstars

Protesters highlight Chancellor George Osborne's reduction in income tax for high earners

The chancellor told BBC Radio 4's Today programme that the 50p tax rate he inherited from the last Labour government was a "con" that the rest of the world "laughs at".

What he meant by that is the people it was supposed to tax have been adept at exploiting devices to avoid paying it. So, he claims, it yielded very little and cutting it to 45p in the pound will cost virtually nothing.

Hmmm. The statistics produced by HMRC indicate the yield from the tax was small. But that doesn't mean its abolition won't be expensive.

As I pointed out here on Wednesday, the £3bn question is whether a direct £3bn reduction in the tax payable by the 250,000 people earning more than £150,000 a year gives them a strong enough incentive to stop exploiting tax reliefs and loopholes.

And if they won't volunteer to be less aggressive in tax planning, will the planned new ceiling imposed by government on the exploitation of tax reliefs, combined with the impact of a General Anti-Avoidance Rule, turn out to be effective?

We are not going to know the truth of any of this for years, because the tax cut and ceiling on reliefs won't come in for a year, and the anti-avoidance rule will take longer to put in place.

Also, because of the lag in tax payments built into the self-assessment system, it will be the start of 2014 before we have any serious clue about what kind of money is being raised from the lower rate.

In the meantime, the government expects to lose £2.4bn of precious revenue in the current year, as the 250,000 highest earners defer dividends and bonuses to take advantage of the deferred lower tax rate and load up with tax reliefs before a ceiling is put on them.

Which is why, as I mentioned on Tuesday, it is odd that the chancellor deferred the introduction of the tax cut and the clamp-down on reliefs.

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Most pensioners can't change their domicile to Monaco”

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He knows that one of the iron laws of tax policy is that those who can avoid paying tax - wealthy individuals, multinationals - will do so.

Take Glaxo, which is back building a new factory in the UK for the first time in 40 years, largely because of a reform called the "patent box" that reduces the tax payable on British exploitation of some forms of intellectual property.

Then there are the changes to the taxation of multinationals, the Controlled Foreign Company Rules, that are supposed to be tax cuts, but which the Treasury expects to raise £300m of additional revenue - presumably because fewer companies will have an incentive to move abroad.

Of course the vast majority of British people and British companies have limited ability to avoid tax or to relocate abroad to escape it altogether.

What Mr Osborne didn't say Thursday morning, though he might have thought it, is that his freeze on age-related allowances - his so-called "granny tax" that raises more than a billion pounds a year - is a completely bankable tax-raising measure, for the simple reason that most pensioners can't change their domicile to Monaco.

So being chancellor involves two often conflicting judgements: which tax measures will actually be effective in raising money; and which tax measures will be seen to be fair?

He can reach into grannies' pockets, although many would say that's not fair. Whereas he might well be widely cheered if he did the same for the super-rich, except that their pockets seem to be sewn shut.

The other challenge is that the consequences of tax changes are dynamic, not static.

If businesses and business leaders who benefit from tax cuts use some of the extra income they've retained to make new job-creating investments, as Glaxo has done, then the benefits of their tax saving will be more widely shared.

But, at the risk of stating the obvious, just as it's difficult to force the wealthiest to pay tax, so it's impossible to force them not to hoard all their extra cash.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 233.

    Hacky @229
    Groucho Thanks!

    Underlining need to have just ONE thing clear…

    We come together, AND we part, as EQUALS!

    Live to 'fight' another day, and still share at least basic economic orientation

    John Campbell @232
    Our children at least as moral?
    But 'we've' not made it easy
    From Heroes, to Quislings of Mammon
    Back to the ranks!
    @204: Matters of sense and of choice and of defining Humanity

  • rate this

    Comment number 232.

    Has it occured to you that Pensioners are an easy target because they have never let the counrty down?
    So many relatives dead in fighting wars they never started.
    Voting every five years or so for Politicians they trusted.
    Trying hard to not be a burden on society.
    Then to be told..we are a burden..The Taxes and NHI we paid,count for nothing.
    Sorry for causing such havoc..

  • rate this

    Comment number 231.

    All for All @ 229
    Whether Tea Party or Marxist Critical Theory, this is the anthem for political meetings.

  • rate this

    Comment number 230.

    All for All @226 cont..

    Labour's policies on social housing favoured decentralisation and were working quite well.

    Economically, the UK has favoured mega corporations for decades. We need a rebalancing to the SME sector.

    Institutional size prohibits freedom. Too big to fail, too big to tax, too big to obey the law, too big for freedom and human rights.

  • rate this

    Comment number 229.

    No need to revisit 19C Paris - any discussion can go astray

    Ever been on a committe. or to a Party meeting!

    To quote 'authority (at least second-hand)', "when two or more are gathered together…", for business, it might be suggested to be, "…in Democracy's name"

    Blessed with education, and not to chant any thing from Animal Farm, certainly not the bit about, "some more equal than others"!


Comments 5 of 233



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