Does the 50p tax rate work? We won’t know for five years

Here is a silly bit of crowing in the Guardian about how the 50p tax is actually raising money for the state. It isn’t silly because the numbers are obviously wrong – it may well be the case that the rate has bumped up the tax-take in the 2010/11 tax year, although not by nearly as much as its fans hoped it might (note that, so far, the total self assessment-take is actually down £500m or so on last year).

But it is silly because it assumes that, if it has bumped up the tax-take, then it will continue to do so. A good many 50% payers will have found that there is little they can do about their new tax rate in the immediate term – they get paid PAYE, so avoidance is tricky, and those who are freelance or self employed may not have stopped to think about it in time for this year’s tax bill.

However, if they have just sent their January cheques off to HMRC, I can pretty much guarantee they are thinking about it now. Next year, they might work less. They might contribute more to their pensions in order to avoid the rate altogether (everything over £150,000 put in a self-invested pension plan (SIPP) gets the 50% paid back – see subscribe to MoneyWeek magazine for more).

If they haven’t already, they might incorporate. If they are relatively footloose, they might move abroad for their high earning years: if you can be a freelance from Bristol, you can probably be one from Hong Kong too.

They will move all their income producing assets into their non-50% paying spouse’s name. They will pay the maximum into CTFs, junior ISAs and ISAs and they’ll start looking more closely at the tax-free income on offer from various renewable energy projects (expect to see a whole load of wind turbines going up in your rich neighbours’ gardens). And if they are already rich entrepreneurs, they might just not bother with their next project.

We don’t yet know exactly what the elasticity ratio of our rich is (the extent to which they change their financial behaviour to avoid tax). But I suspect – from my conversations with the high-paid and from the data so far – that the next five years will prove it is a great deal higher than the last year suggests.

Let’s not forget that the UK now has one of the highest top rates of income tax in the world: only Sweden and Denmark charge more (see the chart in the Spectator but ignore the words – there is a mistake in them).

Until I see genuine evidence to the contrary (which I don’t expect to), I can’t see much reason to think of that as a good thing.