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.