The myth of the millionaires' exodus over the 50p tax rate

Blog for HuffPost
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The myth of the millionaires' exodus 

This week the Treasury spin machine went into overdrive in response to Labour's push to highlight the cut in the 50p top rate of tax.

The centrepiece of their case was that the 50p tax had reduced the number of millionaires paying tax in the UK by 10,000 from 16,000 to just 6,000. The Telegraph faithfully reported their argument, informing us that "two thirds of millionaires left the UK to avoid 50p tax". The Mail did likewise, publishing unquestioningly Harriet Baldwin's extrapolation that this cost the UK "£7 billion in lost tax revenue".

This narrative has been accepted by the right - of proof of the age-old maxim that taxing the rich proves counter-productive - and even by the left, as a cause for despair. It's also reached the other side of the Atlantic, giving succour to the Republican blogosphere in their argument against Obama's case on the 'fiscal cliff'.

The trouble is, it isn't true. Or at least there is no credible proof that it is.

The figures used have been worked up on the same basis as the HMRC's report on the 50p tax back in the Spring - and they're disingenuous for that same reason.

As I argued in a piece for LibCon back in March, this report was fatally - and probably intentionally - flawed, seemingly fixed to reach the conclusion George Osborne wanted it to. Primarily, this was done by isolating the top rate tax yield for tax year 2010/2011 - the year the 50p tax was introduced. The report showed a significant drop in top rate revenue for 2010/2011 from 2009/2010, and this was the main basis of the argument that the 50p tax 'raised no money' which justified it's abolition.

A gaping hole in this argument is that by the HMRC's own admission, a great deal of this drop was accounted for by (the non-PAYE paying) super-rich bringing bringing forward their income ('forestalling') and declaring it in 2009/2010 tax year instead, ahead of the pre-announced 50p tax rise. The key point is, by its nature forestalling can only happen once - those who did so could not have kept doing it in the years after; they would have had to have paid up. The 2010/2011 yield was thus artificially deflated; totally anomalous, and unreliable as a baseline. There may have been other more permanent forms of evasion in the mix, but the only way of knowing this - and the true effectiveness of the 50p tax - for sure would have been to wait for 2011/2012 returns. Which is presumably by Osborne avoided doing just that (given there was good evidence it raised a significant sum of money).

And so to yesterday's numbers. They too take 2010 figures, on the number of people declaring an income above £ 1 million, compare it to 2009 and note a drop - leaving the Telegraph and Mail to argue without evidence that they have all moved abroad. But just as with the tax yield, these figures are highly distorted and unreliable, given we know many top rate payers moved their income for 2010 forward to 2009 (this is especially likely to be the case with millionaires, as few would be on PAYE).

Treasury sources go on to state that the number of millionaires is now 10,000 - and shamelessly attribute this to Osborne's announcement of his intention to cut the 50p tax. In reality, it's much more likely that this increase is simply those who forestalled in 2010 returning, as they inevitably have to (a large part of the remaining gap between this figure and the mid-to-late 2000s numbers is likely explained by the financial crisis).

There remains little to no evidence that high earners have, or are planning to, move abroad in response to high tax regimes. For people on the right and left to take such blatantly skewed figures at face value does a real disservice to the level of debate an area as totemic as tax policy should demand. Sadly, I doubt the sleight of hand will stop here. My guess is the next trick will likely come a year before the election. Given the cut in the 50p tax has been pre-announced, it's possible that some income will be delayed being declared until after the cut - some chartered accountants are already advising the super-rich on just that. This will artificially inflate the 45p rate 2013/2014 revenue, allowing Osborne to compare it to 2010/2011 and announce the top rate cut a great success in getting the rich to pay more. If the debate on this issue so far is anything to go by, it's likely he will go unchallenged.

There are evidently parts of the Government intent on fighting a war on behalf of the richest 1% in our society. The first casualty of that war looks to be the truth about the 50p tax.

It's political economy, stupid

As much as I enjoyed myself, a weird feeling stalked me as I shuffled through corridors from event to event, panel discussion to panel discussion at last weeks' Fabian conference. In retrospect it was a restlessness that the answer to every question earnestly pondered – What can the left learn from the right? How do campaigners deal with the deficit?- belligerently remained the same, even if the wording changed, or the faces of the speakers differed from the last.

When you drill down into so much of centre-left soul searching in 2011, the absence of a coherent political economy lies at the root of almost all of it, even if it's rarely acknowledged.

The last few years have finally seen progressives get their critique of neo-liberalism right. Space has opened up after the financial crisis for us to question effectively previously untouchable dogma over the efficiency of free markets and the evil of state intervention. Meanwhile, the extent of public anger over bank bonuses and popularity of the 50p top rate of tax chips away at Blairite mythology that 'aspirational' swing-voters will always view increased taxation as 'the politics of envy'. Labour has even started to find its feet in arguing against the pace of deficit reduction (Ed Balls' famous Bloomberg speech is still the pick of the bunch), while turning to focus on stagnating average incomes (Liam Byrne is good on this here).

These are all sound intellectual advances. But the problem is that at the moment, they remain just that. It remains for progressives to colour these in with practical policy, and then to sell these in a way that is accessible to the wider public and activists knocking on doors. The reason the right has been ascendant for so long on economics is because they have a philosophy that cascades down from the the thinktank ("Free markets are the best way to efficiently allocate capital, government intervention always leads to inefficiency") to the doorstep ("governments shouldn't pick winners, it's bloated and should get out of the way"), translating to peoples everyday experiences or emotions ("why should the government waste my money? I am the best judge of how to spend it"; "We can't go back to the 1970s"), out of which flow practical policy implications (e.g cutting corporation tax, privatisation, deregulation). The latest example of this is the Tories misconceived idea that the private sector will necessarily 'pick up the slack' on unemployment resulting from cuts to public spending.

Meanwhile on the deficit, the right remain aided by the famous imagery of 'maxing out the creditcard' or 'household budgets' ("I have to balance my books, why shouldnt the government?").

The centre-left still cannot compete with this. Even if we are now challenging these ideas at the level of the thinktank, our arguments from there remain fractured or incomplete. For example, if we are agreed that New Labour became over-reliant on tax receipts from financial services, how should we look to 're-balance' our economy? This will usually prompt talk of 'broadening our industrial base' (as echoed recently by Ed Miliband), but what does this mean? How do we make our industry competitive in a globalised economy? Likewise, if we are agreed that median wages are stagnating, how do we get them to rise? Is it just a case of growth as an end in itself, or should the government be directing investment in to certain areas? If so, how? By what means? Assuming we believe in capitalism, what should it look like? How should we translate complex Keynsian arguments over public spending into bite-size chunks of common sense?

These are just a few of the critical questions that, from what I can see, are not being progressed or followed through on. Even the most prominent centre-left writing of the last few years (e.g Ill Fares the Land, Them and Us, 23 Things They Don't Tell You About Capitalism) is vague on policy, usually impotently acknowledging that it 'doesn't have the answers', but we should at least 'ask the questions'. A lingering sense I got from people at last weeks conference was that if we just taxed the bankers more, everything would be ok. Some are happy for the left to simply be the new 'conservatives', acting as stalwarts of public services under attack from budget cuts.

This is not enough. As popular as it may be in the short term, it doesn't constitute a coherent economic argument and it will not win elections or change the country in the way we want. For all the huff and puff over the end of neo-liberalism, it is still the right who are the radicals, still social democrats who are on the defensive. This does not represent a substantive change in the pre-crash, post-1970s state of play; progressives just have more numbers on the field than they used to, more men behind the ball. To win, it needs to be far more creative.

The rewards for doing so would be great. A coherent alternative political economy would give the left the chance to turn so many debates on their head. Take welfare dependency as an example. Instead of pandering to hatred of those dependent on welfare and extending the current logic of just cutting benefits (or alternatively ignoring the issue), we could legitimately ask why bottom end wages are so low that living on meagre unemployment benefit is a more attractive option, and map out how we can get them to rise. Or, on the banks, we wouldn't need to be held to ransom by obscenely paid financiers who threaten to pack up and head for pastures new every time the status-quo on tax or bonuses is challenged.

Unfortunately, this seems a long way away. Gordon Brown's 'markets need morals' was a good start, but what was it underpinned by in practice? It read more as a plea. Ed Miliband's current problems on the economy are just a projection of the centre-lefts wider dilemmas. Increasingly, it seems we have started an argument we cannot finish. This is the the extent of the challenge for the likes of Ed Balls, as he puts his feet under the table as shadow chancellor. Obviously, I don't have the answers, I'm just asking the questions...

Fear itself: Insecurity, not ideology, is the key to understanding the Lib Dems' predicament

Suddenly everybody is an expert on the Liberal Democrats. Among the weirdest outcomes of this years political convulsions has been the transformation of previously disinterested commentators into self-appointed emissaries from planet yellow, explaining the every move and thought of the party in coalition.

The tool of analysis which most of these sages have settled for their chin-stroking is that of the 'Orange Bookers' v the 'Social Democrats'. They inform us that the Lib Dems are led by economic liberals 'at odds' with the social democratic 'grass roots' or 'old guard'. This enables them to explain the history of the coalition as a product of this divide: Clegg was always 'instinctively closer' to Cameron than Brown; the two are "bound by their shared hostility to the state" (Steve Richards); "Just as much as Blair and Cameron, Clegg aims to replace British social democracy with a version of Thatcher’s market-based settlement" (Jon Gray). Even Andrew Adonis recently echoed such a view.

But this is misguided. There are differences in outlook, of course, but the party doesn't factionalise along these ideological lines. The Lib Dems who have rebelled most so far are hardly left-wing ideologues and it's simply not true that the leading lights of the party share a centre-right ideology. It's more complex than that. Chris Huhne, for instance, wrote Reinventing the State, the book frequently touted as the ying to the Orange Book's yang, while Cable comes from a Labour background and he and Clegg devised for the party a whole host of policies (on tax, inequality, banks etc.) which can scarcely be called Blairite.

More to the point, the 'Orange book' analysis obscures the main driver of Lib Dem behaviour since 6^th May: fear. Fear of another election, fear that the coalition will fall apart, fear of electoral decimation at the hands of the Tories.

Most detailed histories written of the Coalition so far suggest it itself was conceived in fear. During negotiations and after, Cameron held up (explicitly and implicitly) the threat of a snap second election in autumn should the Tories be forced into minority government. There's a good chance this would have allowed them to blame Lib Dems for the preceding 'muddle' and turbulence, campaign for a majority and wipe many of the already fragile marginals the Lib Dems hold off the map. It seems the fear of this, with a deal with Labour not viable, is primarily what drove Clegg to lock himself and his party so firmly into a five year coalition, rather than any 'confidence and supply' arrangement.

The trouble the party is now facing, is that this logic is now perpetuating itself over and over again and it is spiralling the Lib Dems into electoral oblivion. Fear that the coalition will collapse and of the resultant election seems to be playing a significant part in justifying faithful parroting of the Tory line, word for word, on almost every issue.

This has lead to the Lib Dems being almost indistinguishable from the Tories, and seen the party's poll ratings plummet. Yet, ironically, the more the polls sink the more the logic justifies itself, as by implication the worse the election performance would be. This is a large part of the architecture of the Lib Dems own 'There is No Alternative' narrative on the coalition.

It's a dangerous gamble, based on the premise that if the economy recovers, by 2014-2015 the Lib Dems will be rewarded in the polls. But polling since May has already shown cuts and fees have punished the Lib Dems disproportionately to the Tories. So if Tory/Lib Dem poll ratings and electoral performance are not fixed to each other, then neither should the Lib Dem and Tory line.

So where now?

While not being an expert myself, I'd say it's been fairly obvious from the start that the main way the Lib Dems can succeed in coalition is by being seen to sand down the edges of Tory extremism and carrying, as far as possible, the 'equidistance' ethos of opposition into government. But their current approach of hugging the Tory line close from the beggining militates against this, limiting Lib Dem influence and hamstringing the party's ability to promote any genuine concessions.

Take higher education reform as a case in point. The Browne review reccomended lifting the cap on fees. But that day, Cables support for the review was full throated. It was Cameron, then Willetts, that signalled the row-back and eventually the retention of a cap. This should have been the other way around! The Lib Dems initial echoing of the Tory line left them no room to sieze on improvement to Browne. If they had taken a step back, staked their opening position a little more carefully, briefed their opposition a little more openly, put their name to row-backs, they could possibly have limited the damage they are suffering on this issue now. At the very least, this approach provides a good template for other, less totemic, policy issues going forward.

Instead, their actions suggest that behind closed doors the Lib Dem leadership is being bullied by the Tories and their spindoctors. Its probably also a case of Westminster politicians operating according to Westminster orthodoxy: difference equals 'splits', splits are bad. But the Lib Dem leadership needs to think outside this political box. Just hanging is not a strategy that will ensure the party's recovery.

What is needed is at least a kind of 'ochestrated disagreement'. Clegg and co need to argue for room to be seen to disagree from the beggining on certain issues, to be seen to force concessions and claim them as their own – school sport presents the latest opportunity. They need the spirit of their coalition negotiations within government, to openly define themselves as much against the Tory right as Labour. This would give them a platform to build on for the 2015 election, wheras on present course it's difficult to imagine how they could forge one.

The leadership should argue with Coulson and Cameron the need for flexibility in this respect – there is no reason if they are aware of this strategy that it will break the coalition. Moreover, the Tories own poll ratings are worsening and there's no guarantee they themselves would fancy their chances in a snap election. The Lib Dems may have more room for manoeuvre than they think in this Coalition- but if they don't start to properly use it, they'll continue to lose it.