Only 1 per cent of the population earn enough to pay the 50p top tax rate. So why all the fuss?
The 50p top rate is seen by some as the 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 – having up to now being unwilling even to try to get a business succeeding due to the fact that they would be charged a 50p marginal rate on some of their earnings.
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 make sure that the pain was equally spread around the different income groups. And it was realistic on what a 50p rate would and would not do.
For 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 6 times the typical full timer's wage and three times what someone as high as the 90th percentile gets. Only around 1% 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 they thought that those who earn these sorts of sums are pretty smart at avoiding ever paying such a rate – they turn their wage earnings into capital gains, or hide them away in different ways aided by good and expensive accountants. The IFS do speculate that there may be a bit of emigration to places with lower marginal taxes – but their argument is clearly not that revenues will be low due to the economic impact of the 50p rate.
In addition the IFS attempt to work out how revenues might change in response to tax changes at the top is based on a very old policy change in the UK, the Lawson tax cuts of the mid 80s – and a number of experts have pointed out that the impact of that cut on revenues is very debatable and that circumstances are very different now.
The Treasury themselves reckon that the 50p would raise some serious money – up to £2.4bn. If they are 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 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.
But the real problem with scrapping the 50p is that it wouldn’t do too much to crack the big problem we have in the short run which is a complete lack of consumer confidence which in turn has made business reluctant to invest. In fact axing the 50p now would probably have the opposite effect. Telling the public that despite us all ‘being in it together’, that same government that put up VAT for everyone, that is slashing the effective remuneration of public sector workers through major hikes to their pensions, that is closing Sure Start Centres and abolished the EMA scheme to help poorer children stay on at school, has decided that the key reform is to reduce the 50p for people on salaries most can only dream of, would be a blow to confidence in the government not a boost to it.
The 50p rate was not brought in to necessarily be a permanent part of our tax structure. Marginal tax rates do matter and they signal things about attitudes to aspiration and wealth creation which matter in a globalised world (even though overall effective deduction rates in the UK are pretty competitive due to lower social security costs than some and much less need for costly private health premiums than others ).
However, to argue that scrapping it is the key to a fast turn round in the economy and to a successful medium term growth strategy can easily look like special pleading by a very small proportion of the UK population. Case very much not proven.
Dan Corry is an FTI consulting director and a former adviser to Gordon Brown. This is a longer version of a blog first posted on City A.M.
