Should the 50p rate be scrapped?
SAJID JAVID, MP
THE last Conservative manifesto was unequivocally right to include the pledge that “we do not regard the 50p tax rate as a permanent feature of the tax system” as, indeed, was Alan Johnson when he called for it to be ditched last November, when he was Labour’s shadow chancellor.
Introduced by the previous Labour government in its dying days, the 50p rate is something the coalition government should abolish as soon as possible.
That’s why I was delighted when the chancellor announced a review of tax on top earners in the last budget. I’m confident that it will show that the 50p rate raises so little, if indeed it raises anything, that its abolition would be unlikely to harm revenues. There are three obvious reasons it needs to go.
First, all empirical evidence on the relationship between tax rates and tax revenues shows that, after a certain point, tax cuts lead to higher revenues. As one who supports a progressive tax system, I want the rich to pay more in taxes. The way to achieve this is through scrapping the 50p rate.
When Margaret Thatcher slashed the top income tax rate from 83p to 60p, and eventually to 40p, taxes paid by the rich rocketed. During the Thatcher years, the income tax take from the top 10 per cent of earners went up from 32 per cent to 45 per cent. Similarly, the Reagan era tax cuts in the US led to higher tax revenues from the rich.
Second, the 50p rate makes the UK extremely uncompetitive for high earners. After Sweden and Denmark, we have the highest top tax rate in the world. Such a punitive rate only puts pressure on those affected by it to mitigate their tax exposure however possible. Whether this takes the form of tax avoidance, tax evasion or even leaving the UK, the result is always the same: a drop in total tax revenue.
Third, scrapping the top tax rate will provide an immediate boost to economic growth. Other supply side measures the government has already taken, such as cutting red tape and investing in skills are also important, but they all take far longer than tax measures to kick in.
The people who create wealth in our society do so most often by risking everything they have in the hope of greater returns. It is a step that many people are unwilling to take. This profit-seeking motive should always be welcomed, and never treated with contempt or ridicule, as it generates additional wealth not only for those who start up the business but also for all those who are employed by it, supply it and trade with it.
It will take courage to scrap the 50p tax rate. But given the tough, but necessary, economic decisions the coalition government has already made, I am personally convinced that the right decision will be made.
Sajid Javid is the Conservative MP for Bromsgrove.
The emotion and politics surrounding the 50p debate far outweighs its economic significance and the heat is growing as Lib Dems and Tories argue out the issue publicly.
The 50p top rate is seen by some as a major factor holding back a nascent economic recovery. Cut it back to 40p, goes the theory, and enterprise will gush out of every pore. Firms who are queuing up to leave the UK will change their minds. Entrepreneurs will emerge from every university and back street.
So were we mad in announcing the introduction of the 50p back in Budget 2009? Was this Labour getting its own back on the wealthy and taking revenge on the bankers? Conspiracy theorists may think so but in fact it was a pragmatic response to needing a plan to reduce the deficit and making sure the pain was equally spread around different income groups. And it was realistic on what a 50p rate would and would not do.
Take a hard look at the policy. The 50p tax rate does not come in at median wages or even at average wages. It comes in at £150k. That is six times the typical full timer’s wage and three times what someone as high as the 90th percentile gets. Only around one per cent of the population earns this much. It is a marginal tax rate that applies solely to earnings over £150k not to those below it as popular discussion sometimes suggests. Not only that but if the much desired rebalancing of the UK economy is to happen we will have to see the rise of middle sized manufacturing firms. The key people to boost this sector rarely earn the sort of money that the 50p tax rate would impact upon.
The trouble is that perspectives on these issues are highly coloured by the experiences of those who most strongly advocate them – the very well paid in the City and the CEOs of the biggest firms. The 50p does mean they pay more – and unsurprisingly they would love it to go.
But surely it might be argued, don’t experts say that the 50p rate won’t raise much money? That is certainly what the Institute for Fiscal Studies said a while back. This was mainly though because it thought that those who earn these sorts of sums are pretty smart at avoiding ever paying such a rate – they turn earnings into capital gains, or hide them away in aided by accountants.
The Treasury reckons that the 50p tax would raise some serious money – up to £2.4bn. If it is right then scrapping it will leave a hole in the Budget that needs to be filled in another way – and there are no easy options. In truth we do not yet know how much it will raise and therefore how much scrapping it would cost – although some economists pointed to unexpectedly high revenue from income tax recently that may point to even higher revenues from the 50p than the Treasury thought. Case very much not proven.
Dan Corry is an FTI Consulting director and a former adviser to Gordon Brown