Last week's Budget announcements were not so much a soaking, more a light shower for the wealthy. But is there more of the same in store, and what revenue will it raise? Simon Sweetman is on the case

The Institute for Fiscal Studies has posed itself the question Will income tax changes for the very rich raise any money ? and produced a research paper [1] which attempted to answer it.

It looked at the proposal to increase the higher rate to 45% for those with incomes exceeding £150,000 a year from April 2011 – which will now be 50% from April 2010. Now this is hardly squeezing the rich until the pips squeak, as Denis Healey didn’t say, since the starting point here is approximately six times the average wage, and it would affect approximately the top 1% of incomes, but one would suppose it might raise something. The IFS manages to conclude that it would actually reduce the government’s income if people respond as they did to the last set of changes to the highest income rates.

Now, unless I am very much mistaken, that was a very substantial cut in the top rate from 60% to 40% and the assumption that there would be a similar response (presumably, in fact, a mirror image response) seems implausible. In particular, it is strange but true that when the rate went down nobody seems to have lessened their efforts at avoidance, but if it goes up they will redouble those efforts.

The world is rather different today from 1988 and the level at which the top rate of 60% kicked in was £41,200 (perhaps roughly equivalent to £100,000 today) : more to the point it represented a significant reduction for incomes down to about £20,000 a year. The higher rate kicked in for 1988/9 at £19,300.

It would be an easier way to raise the money, says the IFS, if the 40% rate were to be raised to 43%. Now it is still only about 10% of UK taxpayers who pay higher rate tax (and worth remembering, too, that given the current rates of NIC that the higher rate is hardly a higher rate at all for employment income). But other things have changed since 1988 as well, and they include the massive increase in property prices (and so of mortgages) and the disappearance of mortgage interest relief, and the introduction of student loans and their repayment. There are 40% taxpayers who are also entitled to tax credits, so a simple increase to the 40% rate will impact not only on the comfortable, but on people with financial difficulties already.

But there is an interesting comment in the first paragraph of the IFS press release, when it says that the projected 45% rate is “more likely to reduce revenue” without additional steps to tackle tax avoidance or to discourage people from reducing their taxable income by other means. In other words, there is no point in raising tax levels for the rich because they can get round it : you need to tax those who can’t afford expensive advice. One obvious ploy which has been tackled is pension relief. If 25% of relief for pension payments goes to the top 1.5% of earners, it isn’t really doing the job it’s intended for and a restriction seems reasonable.

There may of course be joy in the avoidance factories, expecting more people to flock to their doors, and probably also believing that the present annoyance with tax havens will go away over time and it will be business as usual, especially as we will have had a change of government. Or maybe there is a real prospect of international cooperation this time.