What is the disagreement between the Treasury and the Institute for Fiscal Studies about?

Alistair Darling announced in November that the government would bring in a new top rate of income tax at 45% from April 2011. He said it would raise £1.6bn, with another £1.6bn for abolishing personal allowances for those on incomes above £100,000 a year. The IFS says the 45% tax rate will not raise anything like £1.6bn, it is likely to reduce revenues for the state.

How can higher tax rates lead to lower revenues?

There are two main ways. Firstly, those paying the higher rate have a lower post-tax income to spend. That has an impact on VAT receipts and other indirect taxes. Secondly, the 1% of people affected by the change are likely to change their behaviour. They may work less hard, emigrate or not come to Britain from overseas. Or they avoid paying income tax by putting money into pension pots or by re-classifying income as capital gains.

Didn't Darling take this into account?

Yes he did. The dispute is about just how big the changes to ­behaviour might be. The IFS believes the ­negative response from high-rate taxpayers will be greater than the ­chancellor anticipates. The Treasury says its ­estimates are based on information about tax receipts not available to the think tank.

Who is right?

Nobody knows for sure. The IFS frankly admits that its assumption is based on data gleaned from the late 1980s, when there was an increase in tax revenues when the top rate of income tax was cut from 60% to 40%. But the late 1980s also saw higher salaries for executives in privatised industries, Big Bang in the City of London and the political encouragement of greater income inequality; all of these could have contributed to a higher tax take from the top 1% of earners.