A report by a committee of MPs has said that the costs and benefits of cutting the highest income tax rate from 50p to 45p are ‘highly uncertain’. They argue that the figures quoted by the Coalition government could be significantly out.

The warning is contained in the MPs’ analysis of the 2012 Budget measures. It calls on the government to publish a comprehensive assessment of the exchequer effect of the new 45p rate.

Other key points in the report

• The net effect of increasing the personal tax allowance and lowering the higher-rate threshold is estimated to be a cut in government revenue of £3,320 million in 2013/14: but the government has not disaggregated the two effects, or provided an estimate of the number of people who will be brought into the higher-rate tax rate. The MPs called on the government to set out separately in future the revenue effect of each tax decision.
• The government’s latest proposals for withdrawing child benefit through the tax system for households with a higher-rate taxpayer (from January 2013) solve only one of the two main problems identified with its original policy, and add further complexity. The MPs highlighted the extra administrative burden: 500,000 more people will have to fill in self-assessment forms because of the changes, and it will cost £100 million in HM Revenue staff over five years. They also questioned the fact that one person’s income, in the form of a benefit, may need to be declared on their partner’s tax return – and whether this represents ‘a step backwards for women’s financial emancipation’.
• The government should consider whether there are any measures that should be taken to mitigate the redistributive effects of ‘quantitative easing’ measures by the Bank of England – and in particular the losses incurred by people taking out pension annuities in a climate of very low interest rates.

The MPs report (Budget 2012, Thirtieth Report, Session 2010–12, HC 1910, House of Commons Treasury Select Committee, TSO) is available on the UK parliament website.