It's not obvious that killing the 45% rate is actually a tax cut

Eliminating the 45% income tax rate is clearly a cut in tax rates. Whether it’s actually a cut in tax is another matter. Will those high earners end up paying more actual cash in tax as a result of the cut in the rate to be paid?

This is, of course, to consider where the peak of the Laffer Curve is. What is the tax rate that maximises tax income?

The usual and standard source for considering this has been, for the past decade at least, the Diamond and Saez paper. About which we should say a couple of things. It looks not at income tax rates, but taxes incident upon incomes. So, this includes employers’ national insurance, along with any other taxes that might be incident upon incomes (for the US Social Security perhaps, Medicare taxes, state taxes and so on). It’s also directed at the US tax system which is, most importantly, a passport based system. If one is an American citizen one does not leave the American tax system by leaving the country, earning no money there (and deriving all income from outside the US) and so on - as Boris found out when he sold his house. This is entirely unlike the system everywhere else (except Eritrea) where leaving the country means leaving the tax system by and large.

Within the calculations by Diamond and Saez this would be known as “a deduction”. Or even a possible method of tax avoidance - which is, note, the entirely legal process of reducing tax bills. As they say:

“When a tax system offers tax avoidance or evasion opportunities, the tax base in hen a tax system offers tax avoidance or evasion opportunities, the tax base in a given year is quite sensitive to tax rates, so the elasticity given year is quite sensitive to tax rates, so the elasticity e is large, and the optimal is large, and the optimal top tax rate is correspondingly low.”

Given that moving those 26 miles to Calais takes one out of the British tax system the optimal (by which they mean top revenue generating) top tax rate is lower in the UK than it is in the US. In fact, they give a useful estimate of what that rate might be:

As an illustration using the end tax avoidance responses is critical for tax policy. As an illustration using the different elasticity estimates of Gruber and Saez (2002) for high-income earners mentioned above, the optimal top tax rate using the current taxable income base (and ignoring tax externalities) would be and ignoring tax externalities) would be τ * = 1/(1+ 1.5× 0.57)= 54 percent, while the optimal top tax rate using a broader income base with no deductions while the optimal top tax rate using a broader income base with no deductions would be τ * = 1/(1+ 1.5× 0.17)= 80 percent.

In simplistic - too simplistic - terms 80% if there are no dedictions, 54% if there are. And shave a bit more off again if people can simply leave the system by leaving the country.

Again, this is taxes incident upon income, not income taxes. This month (it goes down again next) employers’ national insurance is 15%. We have to add that to the income tax rate to gain the full tax upon income rate.

The top tax collecting rate in the UK is lower than that in the US because of that construction of the tax system itself. We don’t tax citizens living in foreign. With the 45% income tax rate the combined rate is 53%, with 40% it’s 49%.

We do not, not at all, insist that this cut in the tax rate moves us from over the Laffer Curve peak to at it or under it. We’re deeply uncertain that something as complex as an economy can be modelled to this level of certainty. But we do point out that the currently accepted best guess at it leaves the possibility entirely open that it does.

That is, this might in fact be a tax rate cut and an increase in tax collected - so not a tax cut at all.