By Richard Johnstone | 16 March 2012
Chancellor George
Osborne has been warned that a reduction in the top rate of income tax would be
a ‘distraction’ from the stimulus measures that need to be taken to boost the
economy.
Media reports today state that Osborne is set to announce in next week’s Budget
that the top 50% rate of tax on incomes above £150,000 will be cut.
Reports suggest it could be reduced to 45%, or abolished entirely, leaving 40% as the higher rate.
Kayte Lawton, a senior research fellow at the Institute for Public Policy Research, told Public Finance that such a move should ‘not be a priority at the movement’.
Lawton, who wrote the IPPR’s Budget briefing, published this week, said that the emphasis should be on ‘boosting the economy for ordinary people, not for the richest 1%’.
In An economic stimulus for the UK: the chancellor’s choices, the IPPR called for the chancellor to either cut the basic rate of income tax or national insurance contributions to provide an economic stimulus.
Lawton said that this would be preferable to the coalition’s policy of increasing the tax-free allowance because it could be reversed when the economy recovered, and would therefore not permanently reduce the tax base.
She added: ‘The 50p rate is a bit of a distraction from the debate from economic stimulus... It should not be a priority at the moment.’
A study by Revenue & Customs into how much income is raised by the rate, which was introduced by Labour in 2010/11, will be published next week.
Lawton said that if this shows that a 45p rate would raise more cash, then this ‘might be worth considering, but we haven’t seen this yet’.
According to Tim Knox, director of the Centre for Policy Studies, the R&C report is likely to show that the 50p tax rate is bringing in hundreds of millions, rather than billions, of pounds. He told PF that it would be ‘marvellous’ if it were cut.
The CPS called for the 50p band to be abolished in its Budget proposals earlier this week. This would ‘put economic interests above political difficulties’, Knox said.
‘That’s what a responsible chancellor must do, particularly in times of such difficulty,’ he added.
Its policy submission said that the Budget should take action on ‘overtaxed and overregulated’ Britain to enhance growth.
Knox argued that abolishing the rate would cost very little money. ‘It’s impossible to say how much the tax is actually raising, if you allocate the negative effect on spending or people leaving the country.
‘I would be sceptical about any report that said that it would be raising revenue. If you believe in dynamic taxation then you have to accept that there’s a point where very high tax rates don’t reap higher revenue.’
He said that it might be ‘politically convenient’ for the rate to be reduced to 45p, with an announced intention to go further.
But he added: ‘It should be abolished. It would help alleviate the sense that Britain is no longer an attractive place for wealthy people.’
