Finance (No. 4) Bill

Andrew Love Excerpts

Wednesday 18th April 2012 Commons Chamber

[Owen Smith]

What I would accept is that the rate was raised to 50p in the end because we felt that there was still an overriding imperative to help through the period of recession the people in our economy who are the most vulnerable and to ask those who are the most fortunate in our economy to bear the broadest and biggest burden in order to allow that transfer to occur. That is the totemic rationale from our perspective. What is totemic for this Government, I fear, is the idea that the 50p rate is not approved of in the City or by the wealthiest people, but I do not believe that that provides a justification for making this decision—and nor does the Chancellor, which is why he eschewed the possibility of arguing from a political or ideological perspective to justify the cut to 45p. He argued that it was being done on the basis of evidence. In fact, that was the only Keynesian bit of logic in the Chancellor’s Budget speech. He effectively said, “The reason I no longer believe what I believed in 2009 and 2010 is that the facts have changed”, and he changed his view accordingly. In his view, based on the dodgy dossier, the rate was not bringing in the anticipated amount of money, which is what justified paring it back to 45p.

[Mr Andrew Love (Edmonton) (Lab/Co-op)]

There appears to be an emerging cross-party consensus that there is great uncertainty in this area. Is it not therefore appalling that the Chancellor should go ahead at such short notice without any evidence base? Does that not confirm that he had made up his mind without looking at the evidence?

[Owen Smith]

I hate to say it, but it is worse than that. What happened is that the Chancellor made up his mind, and then made the evidence fit his decision. [Interruption.] I am asked where is the evidence, but 32 times in the one exculpatory piece of evidence provided, the Treasury covered its behind by referring to uncertainty. I shall go through them in a minute, but that shows how often it was necessary to justify this damascene conversion.

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[Owen Smith]

I am thrilled to have given way to the Minister, because his intervention has revealed that, although he may have read the dodgy dossier, he has not read the academic literature. If he had done so, he would have read more recent publications such as that of Saez, Slemrod and Giertz, which is a review of all the pieces of work done on TIE. It concluded that many of the earlier studies, including the HMRC study, had relied on estimates that were excessively high owing to flaws in the data and the methodology used. Saez et al suggested that

“the best available estimates range from 0.12 to 0.40”.

That is the same Saez from whose earlier paper the Minister quoted. In his most recent paper, he changed his mind and concluded that between 0.12 and 0.4 was the generally accepted estimate. The Treasury has cooked the figures on the basis of one academic study produced as part of the Mirrlees review.

[Mr Love]

Is my hon. Friend aware that the IFS study that is cited so regularly by Government Members refers to taxes increasing in the 1970s and decreasing in the 1980s, and is way out of date in relation to today’s circumstances?

[Owen Smith]

Absolutely. The key correlation is not between top rates of tax and GDP. There is very little evidence of that. However, there is evidence that top rates of tax have a massive impact on the distribution of wealth across the deciles, and are concentrated on the richest percentage of our economy. That is the truth, and that is why the Government ought not to have made the decisions that they made.

All this stuff may seem rather arcane, but it is central to the Budget. If the Treasury got it wrong—if the amount that will be lost is not £100 million, but a great deal more—the neutrality of the Budget is bust, as is the credibility of the Government. Who will pay the price of that bust? It will not be the 14,000 millionaires who are 40 grand better off as a result of the extraordinary largesse from this millionaires’ Government. It will be the pensioners, the unemployed, the vulnerable, and squeezed middle-earning and low-earning families throughout the country, who will be £500 worse off as a result of this Government’s activities.

We fear that that is the price that will be paid. We believe that written into clause 1 are the priorities and the politics of the Government, which are ideological, value-driven and fundamentally wrong: wrong for this time, and wrong for this country. That is why we will vote against the proposed change and in favour of our amendment, and we hope that Government Members will look to their consciences and do the same.

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[Alun Cairns]

Thank you, Mr Hood, for calling me to contribute to this debate on amendment 1. It is a privilege to follow the hon. Member for East Antrim (Sammy Wilson). I accept some of his points about the importance of the economics, but I certainly do not agree with his conclusion. I will comment on the weakness of the argument presented by the hon. Member for Pontypridd (Owen Smith) a little later.

[Mr Love]

Does the hon. Gentleman accept that the message of this Budget is, “We’re all in this together except for the 1% of the richest people in this country”?

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[Alun Cairns]

My hon. Friend obviously makes an extremely strong point. It underlines the argument that the last Chancellor faced the same uncertainty as the current one. The last Chancellor made a judgment that he should increase the rate of tax, and the current one has made a judgment that he should reduce it. That is the core difference between the Labour and Conservative parties. We want to create wealth, unlike the Labour party, which is the party of envy and wants to punish people and spend their money instead of giving individuals greater choice.

[Mr Love]

The hon. Gentleman rightly says that because of the uncertainty about all these figures, the Chancellor had to make a judgment. Was that judgment a political one, casting doubt on the Government’s claim that it was made for purely economic reasons? It was not an economic decision; it was a political one.

[Alun Cairns]

It was quite obviously an economic judgment, but we cannot ignore the politics, which is what international investors interpret when they are considering placing their money and creating jobs in the hon. Gentleman’s constituency or mine. They consider how much they, their senior management, their greatest innovators and their scientists will have to pay under the top rate of tax. The politics cannot be ignored, but the economics, as demonstrated by the Chancellor and the Treasury team, is sound according to figures from the OBR, the IFS and HMRC. I absolutely accept them.

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[Mr Gauke]

My hon. Friend is absolutely right. Let us put away some of the rhetoric that we have heard this afternoon and focus on the disagreement over the previous Government’s assessment of the behavioural impact of the 50p. Their assessment was that about 66% would be lost through behavioural impact. On the basis of the additional evidence that has emerged following the HMRC study, which is consistent with the consensus of the academic studies in this area, the estimate that the OBR has signed off is that the behavioural impact is closer to 83%. No reasonable case can possibly be made that there is no behavioural impact, yet the shadow Chancellor’s consistent argument that this is a £3 billion tax cut for the rich implies a behavioural impact of zero—miles away from any realistic case.

[Mr Love]

The Minister quotes research that is primarily associated with the United States rather than the United Kingdom. British research under the Mirrlees project related to events occurring 20 or 30 years ago. The reality is that there is great uncertainty in these areas; the Government’s claim that that is not the case simply ignores the reality. We can pick out whatever number we choose, but the reality is that we are losing taxable income as a result of this change.

[Mr Gauke]

The hon. Gentleman is right that the assessment of Her Majesty’s Revenue and Customs, signed off by the Office for Budget Responsibility, is very similar to that of the Mirrlees review, which looked at evidence from the 1970s and the 1980s. Given that the big behavioural impact owes much to the mobility of international labour at that end of the scale—the highest earning individuals in the world are very mobile—and given that the mobility of labour has clearly increased, particularly in that sector, since the 1980s, it would appear that the hon. Gentleman is making a case to suggest that the elasticity we are using is too low, not too high, so he might like to have a conversation with my hon. Friend the Member for Rochester and Strood (Mark Reckless).

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[Mr Gauke]

Thank you, Mr Hood. To return to the matter in hand—

[Mr Love]

rose—

[Mr Gauke]

I do not have much time, so I would be grateful to the hon. Member for Edmonton (Mr Love) if he would allow me to press on.

The Chancellor made it clear in a pragmatic way that we wish to see the evidence. HMRC conducted a review, making use of the self-assessment returns that became available in January this year. They provide the most complete source of data on high earners’ tax affairs, which only HMRC can analyse as they contain confidential taxpayer information. In this report, we have seen that the additional rate is distorted, that it is damaging to international competitiveness and that it is an economically inefficient way of raising revenue. These conclusions are based on that analysis of self-assessment data and international studies. The report finds that the behavioural response has been substantially larger than expected. The previous Government had estimated the revenue from the 50p rate to be approximately £2.5 billion each year. The HMRC analysis states that the yield would be £1 billion at best, and at worst might raise nothing at all. That is because of the much greater than anticipated behavioural effect.

We have seen huge levels of forestalling, and HMRC estimates that between a third and a half of the behavioural effect comes from genuine reductions in income through such changes as reduced hours worked or reductions in participation in the UK labour market. This suggests that total income fell by £2.9 billion and £4.4 billion as a result of the 50p rate, and that gross domestic product is between 0.2% and 0.3% lower. So this is not just a loss of tax revenue, but a loss to the economy as a whole through lower productivity and economic activity. Those are the conclusions of HMRC’s analysis.

It is very clear that the 50p rate has failed. It has been criticised by business, it has posed the risk of lasting damage to the UK economy, and it has raised considerably less for the Exchequer than expected, possibly costing rather than raising revenue.