It's all politics

The Institute for Fiscal Studies, confidently an independent body which is as well informed and equipped as the Treasury, has thrown doubt on one of the proposals to deal (in a very small way) with the massive government debt which is being run up.

The institute investigated the proposals I have mentioned already - to have a new top tax rate of 45p on taxpayers with an income greater than £150,000, that is the top 1 per cent or so, and to reduce tax allowances pound for pound for all taxpayers liable for tax in excess of £100,000, who are considerably more. As all tax allowances will have been eliminated before £150,000, the two proposals are complementary.

Their conclusions are damaging to the proposals:

The higher top rate of tax will not generate the £1.6 billion announced by Mr.Darling last November, even if the extra administrative costs are ignored. The many reasons for this inclue the fact that the removed income will not be spent in generating VAT and other taxes for the government. In addition people can adjust their income for tax legally in many ways, - by emigrating, by working less hard, by increasing pension contributions, by converting income into capital gains or by retiring, etc.

The IFS suggests that perhaps as little as one third of the expected gains to the exchequer could result, and when still other things are taken into account the net result could be virtually zero.

The second proposal, affecting all people with incomes liable to tax up to £150,000, the IFS concedes could be more productive, but even here the added complexity could reduce the tax yield well below the expected figure, also of £1.6 billion.

Why, then, has the chancellor announced this policy, when it will contribute so little to many billions needed to plug the revenue gap for many years to come?

The answer must be, "politics". Labour's left wing are clamouring for blood. Some of the high earners will be the outcast bankers, and others will be their friends, and it chimes well with a redistributive party. Perhaps the party will accept other austerities if a large emphasis can be put on the undeserving rich, bankers and all.