Osborne wrong to scrap 50 pence tax

Photo credit: The Prime Minister's Office

Photo credit: The Prime Minister's Office

On Wednesday George Osborne will unveil his third budget as Chancellor. It seems increasingly likely that in it he will scrap the 50 pence tax rate on income over £150,000. The measure was introduced by the previous Labour government two years ago, and was forecast to raise £7.1bn over its first three years.

Last year Mr Osborne asked HMRC to look into how much the rate was actually raising. That report has been seen by the Chancellor and will be released on Wednesday. It will, for the first time, provide figures on how much the tax raised in its first year – 2010/11.

The Times have reported that the review will show the tax has only raised millions of pounds, rather than the £1.3bn the Labour government forecast it would raise. But, as Ed Balls said on The Andrew Marr Show this weekend, even if the tax raises half as much it is still advisable.

The argument advanced by critics is that a higher rate of tax actually leads to less revenue being raised. This idea has some validity when one is talking about reducing tax from 83%, as Margaret Thatcher did in 1979. But this line of reasoning does not necessarily apply to the 50% rate.

As the Institute for Fiscal Studies, Britain’s leading economic think tank, has noted, the evidence is inconclusive on this. In September 2011 they published the Mirrlees Review, which came to the conclusion that “we do not know with confidence what the revenue-maximising top tax rate is”. It went on to say that it “is certainly not impossible” that the 50p rate will raise revenue.

But even if the rate does not raise much revenue, or indeed raises none at all, scrapping it makes little political sense. YouGov’s weekly poll for The Sunday Times this weekend showed that 60% oppose scrapping the rate, while just 27% support doing so.

Politicians must, of course, occasionally act contrary to public opinion. But there should be compelling reasons for doing so. In this instance there are not. The government cannot be sure scrapping the rate will benefit the UK, and politically Osborne could have afforded to not appease his Party’s right-wing. In January The Telegraph reported the government were likely to keep the rate until 2015 and no backbench movement materialised.

Giving a tax cut to less than 1% of taxpayers, at a time of significant public sector cuts, sends a signal to the electorate that is particularly damaging for a party desperately trying to shred its label as a party of the wealthy. Osborne is renowned for his tactical nous in Westminster, but on this issue he is set to commit an tactical, strategic and political error.

5 comments

  1. 20 Mar ’12 at 5:08 am

    HeadOverHeart

    60% are morons. It’ll almost certainly increase revenue, especially long term. The public hasn’t a clue what’s best for them. How’s about we go for the sensible option rather than the political one for once.
    Man do I wish we were ruled by a benevolent dictator… stop all this point scoring nonsense.

  2. 20 Mar ’12 at 11:37 am

    Beneficial Crossdressing

    Headoverheart. You are essentially an oxygen thief with poor grammatical nuance.

    Your name offends me. Does it imply cruel heartless logic is how we should run politics?

    Your view that “the public hasn’t a clue what’s best for them” is disgusting. When I read it, i presumed that you were spouting the usual thinly-veiled contempt of democracy. Then you wish for a dictator. I feel valuable time is wasted on educating you about democratic values – so let’s move on.

    “It’ll almost certainly increase revenue, especially long term”. This is false. I will write an article and send it to Nouse for your perusal.

    Your dichotomy between sensible options and political options is problematic. They should be synonymous.

  3. 21 Mar ’12 at 12:34 am

    HeadOverHeart

    I’d be interested to read your article on why you think the move won’t increase revenue. My sources suggest that we’re almost certainly sitting to the right-hand side of the laffer curve… far from the optimal point of revenue maximisation. And if that’s the case, I fail to see how it’s cruel heartless logic? It’s just logic.
    Do you really believe the public knows what’s best for them? Isn’t that a bit idealist? Most would rather watch jeremy kyle than the daily politics.
    And there really isn’t any need to patronise, as if you’re some sort of political guru. A benevolent, omniscient dictator wouldn’t be forced to choose politics over economics.

  4. Maybe it was a risky move politically, but strategically it is a brave and important move.

    The overwhelmingly dominant issue debated in parliament over the last few years has been the recession and how to end it, then how to get back to the growth we had… and beyond.

    It may send a signal to the masses that the Tories’ priority are the interests of the rich, but arguably, the largest increase in the bottom rate threshold ever and the other tax measures for the rich attempt to counter act this.

    Together with lower corporation tax and measures to help small businesses, these policies send a clear pro-business signal, to both big and small companies, and restoring growth, not maintaining high taxes, will be the best way to balance the books in the short and long term.

  5. 25 Mar ’12 at 3:15 am

    Harry Lambert

    T.O. – I appreciate the point you are trying to make, about attracting high income individuals that will come here and employ people etc, boosting the economy. An argument can be made on this front (albeit on shaky grounds, in my view).

    But you (and the Coalition) contradict yourself when you point to the ‘other tax measures for the rich’ which attempt to counter the scrapping of the 50p rate. If the Coalition’s new tax regime means taxes on the rich are five times higher, then aren’t you disincentivising those rich you are meant to be attracting by lowering 50p? Which are you doing – lowering taxes to attract the rich? Or raising them?

    This is a point Phil Collins touched on in Friday’s Times (http://thetim.es/GPBQf7) – “We are being asked to believe cutting income tax is a magical upwards incentive, but raising other taxes on top earners has no downward effect, even though they are five times larger. It doesn’t even make logical sense.”

© 1964–2014 Nouse Dashboard | Edit | Disclaimer | Privacy Policy | Cookie Policy | Policies |