Income Tax

Shabana Mahmood Excerpts

Wednesday 5th November 2014 Commons Chamber

[Shabana Mahmood (Birmingham, Ladywood) (Lab)]

We have had a good debate today with some excellent contributions, including those from my hon. Friends the Members for Stretford and Urmston (Kate Green), for Swansea West (Geraint Davies), for Bethnal Green and Bow (Rushanara Ali), for Inverclyde (Mr McKenzie), and for Heywood and Middleton (Liz McInnes) and my right hon. Friend the Member for Holborn and St Pancras (Frank Dobson). We have seen the real divide that exists between Opposition Members and those on the Government Benches about the choices that have to be made at a time when the deficit is still high and rising. Tough times are set to last well into the next Parliament.

We are clear that the difficult choices that have to be made while we get the deficit down must be made fairly, but under this Government, while millions of people have seen their taxes go up, millionaires have been given a huge tax cut. That tax cut is worth an average of £100,000 for those earning over £1 million, and this at a time when households will be on average £974 a year worse off as a result of tax and benefit changes made since 2010. At the top end of the income scale people are a hundred grand a year better off, but at the other end people are nearly a grand a year worse off.

What does that £100,000 look like in the real world? In my constituency, the median income of the tax-paying self-employed person based on the 2011-12 census figures was £8,410, so a tax break of £100,000 for the wealthiest is troubling to me. That £100,000 tax break reflects more than 11 years’ worth of work by the self-employed worker of Birmingham, Ladywood. To put that another way, based on average rents in inner-city Birmingham, £100,000 equates to about 15 years’ worth of rent, so when we throw these figures around, we would do well to remind ourselves what that money means in the real world, and to ask ourselves which policy—the restoration of the 50p rate or the retention of the status quo—most people in my constituency and across the country would find fair.

This Government have totally failed on tax fairness. Sure, they said the words, and they said some very strong words, with clear and unambiguous meanings. The Chancellor told the Tory party conference in 2012 that his famous line “We’re all in this together” was more than a slogan. He said that it

“spoke of our values and of our intent”.

“We’re all in this together”—a sign of Tory values and intent. Who does he think he is kidding? That was just six months before the decision to cut the 50p top rate to 45p took effect. He can say the words as many times as he likes, but it is his actions that he will be judged on, and the Chancellor’s actions show clearly that we are definitely not all in this together.

How do the Government try to get away with making such an unfair choice? Well, their main argument—we heard this today—is that the 50p rate did not raise very much money. The static costing of the cut to 45p is £3 billion, but after behavioural effects are taken into account, they say that the cost of the measure falls to £100 million. But the 2012 HMRC report “The Exchequer effect of the 50 per cent additional rate of income tax”, which the Government relied on to cut the top rate, acknowledges that the scale and value of the behavioural change is highly uncertain.

The scale of the behavioural change is calculated by doing an assessment of taxable income elasticity, and the rate of taxable income elasticity to apply when calculating the scale of behavioural change is ultimately decided by Ministers themselves. Given how desperate they were to get to the pre-determined outcome that the measure raised no money, scepticism about the calculation that they relied on is justified. The IFS and the OBR both say, as I have said, that the figures are highly uncertain. In January this year the IFS said:

“The uncertainty around HMRC’s estimates mean it is also possible that the 50p rate would be somewhat more effective at raising revenue than their initial analysis suggests. HMRC made their calculations at great speed on the basis of one year’s data that had only just become available. Indeed only around 95% of the data was available at the time they made the calculation. By now they have data for 2011-12 too, and soon they will have data for 2012-13 as well. Given this there is certainly a case for HMRC looking again.”

Yet each time we have tabled amendments to Finance Bills since the 2012 Budget asking the Government to produce reviews that would effectively carry out that analysis again, but with more comprehensive datasets, they have refused to accept them. Why? Is it possible that they are afraid that further and deeper analysis might remove their central justification for cutting the tax rate in the first place?

It is not as if the Government do not know that the announcement that the 50p top rate of tax would be cut prompted large amounts of income shifting by higher earners. The OBR has confirmed that money was deferred from the end of 2012-13 to the early part of 2013-14 so that it could be taxed at 45p, rather than 50p. We know that bonuses in the financial services sector jumped by 76%—a staggering sum—in April 2013 as bankers waited until the top rate was cut before paying themselves their bonuses.

The Government’s claim that the cut would cost only £100 million did not take into account the impact of forestalling. They recognised that point themselves when they published the 2012 HMRC report—it was in the small print beneath one of the graphs—and the Minister kindly acknowledged it again today. In its 2013 forecast evaluation, the OBR estimated that £1.7 billion of tax was deferred from 2012-13 as a result of the cut, and the difference between all that money being taxed at 50p in 2012-13 and at 45p in 2013-14 is between £150 million and £200 million. The Government like to say that top earners are paying more as a result of the cut, conveniently ignoring the income shifting that they know, and everyone else has confirmed, took place.

What is more baffling is that tax revenue from the 50p rate has been ceded at a time when the Chancellor and his team are singularly failing to bring the deficit down at the speed they said they would. They said that they would balance the books by the end of this Parliament, but clearly they will not; the deficit is actually rising. They said that they would tackle the problem of uncollected tax, but the tax gap has grown by £3 billion on their watch. We know that people will be worse off in 2015 than they were in 2010—a fact that no Minister likes to confirm at the Dispatch Box.

Furthermore, the Government have just made £7 billion-worth of uncosted pre-election give-away promises, described by the Financial Times as “neither sober nor realistic”. The Minister today ducked the opportunity to give some specific details about where that £7 billion would be found. That is clear evidence that their priorities, which have been wrong to date, will continue to be wrong if they form the next Government.

It was clearly a mistake to reduce the top rate of income tax. It is neither fair, at a time when working people are on average £1,600 a year worse off since 2010, nor economically sensible, when the deficit remains high and is rising on this Government’s watch. I urge hon. Members to vote with us in the Lobby today.