Complacency over the 50% tax rate is unaffordable

February 7, 2014 10:13 am

The Shadow Chancellor’s electioneering for 2015 began last month when he announced that Labour would reintroduce the 50% tax rate should it form the next government. The policy is widely supported; a YouGov poll on 28 January 2014 showed that 61% are in favour of levy, with only 26% against. Most surprisingly, more than a third of Conservative supporters agree with the proposal.

The 50% tax rate has remained Labour’s trump card throughout the last four years of coalition government. This time last year Mr Balls launched the “Tory Millionaires Day” campaign to highlight that the Chancellor and the coalition were doing favours for millionaire friends by reducing the tax rate to 45%. The Labour party has been successful in distorting the facts by making the reduction look like a tax break for millionaires, which they symbolised with a novelty cheque from David Cameron made out to “a millionaire”. However, even if critics genuinely believe the 45% rate is motivated by Tory pandering to the rich, it’s nonetheless hard for them to dispute the policy’s economic case.

As the IFS pointed out in its ‘Green-budget’ report, the income tax alone paid by 300,000 or so of the highest income individuals accounts for 7.5% of all tax revenues. The IFS also highlighted that these earners are disproportionately hit by other taxes on capital – for example transactions in the wealthy London boroughs of Westminster and Kensington and Chelsea accounted for 14% of all cash raised by stamp duty on residential property for the whole of the UK. The IFS concluded that overall tax take is set to significantly rise to 2018-19, mainly predicated on higher income from the top earners. The share of receipts from capital gains, stamp duties and inheritance tax is expected to surge to a record level since the 1970s.

I wouldn’t advocate that high earners should therefore be let off the hook – it’s fair to expect the wealthier to pay more taxes. Arguably it’s fair to expect the rich to pay disproportionately more. However we must remember that if we take the proverbial with the top rate then these individuals have the option to take their money elsewhere. We should bear in mind that many of these people run and manage the prospering UK businesses which bring investment and employment to the country. Burdening these individuals with an extra 5% of income tax will not provide any major yield for us – the IFS estimates the increase in revenue from raising the rate to 50% could be as little as £100 million.

Fundamentally though, a 50% rate is unfair on those who contribute disproportionately far more than their fair share already. Such a high rate is yet to be tested in 21st century Britain, save for a few weeks at the end of the Brown government. Voters should not be complacent and risk alienating those who contribute a large percentage of our tax by asking for more. Labour’s motivation derives from the policy’s popularity rather than its economic credentials. A 50% rate strikes a chord with the electorate and while Labour proposes a higher top rate than their Tory counterparts, they will be able to smear the Conservatives as a party of the rich.

George Paterson

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