Rows over the 50p tax rate are a major distraction from what should really be the focus in next week's Budget: how to create more jobs
The Budget is a week away. The big issue according to the press is whether or not the 50p tax rate survives, or is replaced by some form of mansion or wealth tax. It is quite extraordinary that at a time when 20% of young people in the UK are unemployed, almost 2.7 million people in total are out of work and over 6 million are underemployed that the tax rate of the top 1% of income owners in the UK is the subject of so much attention.
The focus of all political parties in the UK should surely be on jobs, jobs and the creation of yet more jobs. But that's not the case. So let's get the 50p tax rate out of the way before discussing what this Budget should really be about.
I have researched the 50p tax issue. Using HMRC's own data I have shown that in the current tax year (2011/12) over 300,000 people are expected to pay tax at this rate. Altogether they will pay £47 billion in income tax. Of that sum I expect £6.7 billion to have been settled at the 50% rate.
Now of course it can be argued that this is just an estimate, and that HMRC has not allowed for behavioural responses to the tax rate change. But that’s precisely why I have used the second year of their estimate rather than the first as the basis of my work. It seems very likely that in the first year for which this rate was in operation HMRC did indeed allow for a behavioural response and as a result forecast that the number of taxpayers earning over £150,000 would decrease from 311,000 in 2009/10 to 275,000 in 2010/11. It also forecast that their income would fall slightly from £113.2 billion on 2009/10 to £112 billion in 2010/11.
I suspect that’s because HMRC believed there was income brought forward into 2009/10 to avoid the higher rate, as a significant number on the margin of this tax rate succeeded in doing. In fact, the accusation that I have seen made, that these Revenue statistics are mindless extrapolations, appears to be groundless. My prediction that this tax will be a highly effective revenue raiser; that it will be hard to avoid (especially when HMRC say total tax avoidance is only £5 billion a year) - and that few will leave the country to completely get round it - is likely to be borne out.
Arguments to the contrary persist, most of them including the contradictory claims that the tax is harmful and yet totally avoidable. Both cannot be true! Logic of this sort has, however, given rise to the alternative claim that a mansion tax or wealth tax might be more useful sources of revenue raising. Neither seems at all likely. Considerably fewer than 1% of all UK residential properties are estimated to be worth over £2 million. Council tax raises in all £26 billion. The mansion tax adopts a pretty soft approach to collecting revenue from valuable properties. The chance that it would raise anything like the £5 billion or more that I confidently think the 50p tax rate can raise is remote in the extreme. Maybe that’s why some people support it.
Wealth tax reforms would be similarly impotent. Capital gains tax and inheritance tax combined right now collect about £6.3 billion between them a year. There’s no prospect - without a radical change of policy that is very unlikely from a Conservative chancellor - of any likely wealth tax replacing the lost revenue from a 50p tax rate. The wealthy can’t be let off tax right now, unless the government wants to suffer a massive political backlash. So this whole debate turns out to have been a storm in a teacup, distracting attention from the real issue for the Budget, which is jobs.
Job creation is essential since it is the shortage of demand by those out of work or fearing for their jobs that is now the main cause of the UK’s current economic malaise. The stimulus that new jobs could create can only now come from the government. Big business in the UK is sitting on cash variously estimated at between £60bn and £100bn. It won’t invest that cash; firstly, because it believes that its biggest customer – the government – is not going to be spending; and secondly, because it believes that consumers aren’t as a result going to be spending either. This is the ‘paradox of thrift’ that Keynes so cleverly described.
It’s rational for everyone not to spend right now, but if we’re to break the cycle of decline the government has to undertake the apparently paradoxical act of spending none the less. The government can never clear its deficit until it spends to stimulate growth and employment. Until it does, automatic spending multipliers - on benefits and services for those out of work - will mean the deficit always rises.
That spending by the government could, of course, be funded by tax increases, but that makes no sense at all. It would take money out of consumer spending and put yet more people onto the dole, as more businesses fail. It does therefore have to funded by borrowing, which is possible at present because interest rates are so low. Pension funds remain desperate for gilts mixed with index linked products; a likely main source of funds.
How to spend it? Well that’s simple. Such funds could finance the government’s ‘Green Deal’, a potentially huge energy saving programme covering 14 million homes, and supporting at least 65,000 jobs in insulation and construction by 2015. This could be linked to large-scale local authority programmes such as the one underway in Birmingham.
Research by the Green New Deal group has shown that an additional investment of £20 billion spent on solar PV could create 140,000 jobs, with households saving up to £250 annually in reduced electricity bills. There is also the long term gain from energy import substitution, which protects our currency. These jobs would be generated in localities where people live and help provide employment and a career path for many of the 1 million unemployed under-25 year olds.
In one imaginative and fiscally responsible initiative such as this, both the young and elderly could benefit. These are the kind of measures we need in the Budget. But I’m not holding my breath.
Richard Murphy is director of Tax Research UK
