Do higher tax rates actually work?
6th June 2017 by Andrew Scott
Tax is always one of the dominant issues in any General Election and this year is no exception.
The parties have taken different positions on tax to distinguish themselves on policy. In terms of pledges on Corporation Tax rates, the Conservatives have pledged to stick to their commitment to reduce the rate from the current 19% to 17% by 2020, Labour has promised to increase the main rate to 26% whilst re-introducing a small companies’ rate and the Liberal Democrats have committed to re-instating last year’s 20% rate.
The Conservatives insist that lower Corporation Tax rates attract businesses to the UK and in turn create jobs, and Labour believes an increase in the rate is socially just and will bring in more revenue to cover their additional spending on public services. But will these differing approaches to setting tax rates work in terms of what the parties want to achieve?
An interesting statistic is that when the Corporation Tax rate was last at 30% in 2007/08, HM Revenue & Customs (HMRC) collected £47.03 billion. In 2015/16, with the rate at 20%, a total of £47.80 billion was paid into the Government’s coffers by companies. This is a striking comparison, as it suggests that lower tax rates can bring in just as much revenue.
Other factors that need to be taken into account when looking at Corporation Tax receipts include economic growth, with Gross Domestic Product at £1.702 trillion in 2007/08 and £1.865 trillion in 2015/16. Also, the 2015/16 total tax receipts include the Bank Levy and Bank Surcharge which are assessed and collected via the Corporation Tax system. Another major variable is the rate at which companies can write down their qualifying capital expenditure which was at 25% (reducing balance basis) in 2007/08 and 18% in 2015/16, a reduction in tax relief. Let’s not forget, when the Coalition Government came to power, they had a starting position of £36.63 billion total receipts with the main rate at 28%, but the economy had tanked in 2009/10.
Let’s take Income Tax receipts, where a top rate of 50% was put in place for the tax years 2010/11 to 2012/13. To account for any fluctuations which may have been in part caused by tax planning to avoid the increased rate, we shall take the average yearly amount of tax collected over this period, which was £152.15 billion. This compares to an average of £162.82 billion per tax year with a 45% top rate (2013/14 to 2015/16).
It is difficult to tell exactly how much Income Tax is collected at the additional rate and whether the cut in the rate is directly responsible for increased revenues; increases in GDP also need to be considered. However, in the final year the 50% rate was in force in 2012/13, the top 1% of earners contributed 25.1% of all Income Tax revenue. In the tax year 2015/16, this ratio had increased to 28.9%. The number of taxpayers has remained broadly similar, 30.6 million in 2012/13 and 30.7 million in 2015/16 (0.33% increase); this is in spite of the Personal Allowance increasing from £8,105 to £10,600 (30.78% increase) between these tax years. Remarkably, the bottom 50% of earners contributed 10.6% of all Income Tax receipts in 2012/13 and 9.4% of the total in 2015/16. Is this an indication that those with the ‘broadest shoulders’ really are paying a greater share of the tax burden?
Finally, turning our attention to Capital Gains Tax (CGT); the last year that CGT had a top rate of 40% was in 2007/08, also when asset prices last peaked. The maximum rate was cut to 18% in the following year and then increased to 28% part way through 2010/11. In an attempt to strip out the volatile fluctuations in asset prices during the recession, let’s look at the yearly average of CGT receipts in the 5 year period up to and including 2007/08 which was £4.55 billion with a maximum rate of 40%. In the 5 years from and including 2010/11 with the top rate at the lower 28%, £4.89 billion on average was collected. From 2008/09, the abolition of historical indexation allowance for individuals in relation to assets held before 1997/98 and also taper relief needs to be taken into account; for non-business assets, taxpayers would need to hold assets for at least 3 years to claim the minimum rate of a 5% taper relief reduction in the amount of capital gain which was taxable.
Tax yields are difficult to predict with any changes in policy but looking at past results paints an interesting picture, granted there are many other variables to take into account.
(Sources: HMRC statistics & ONS)
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