The debate: Should the 50p tax rate be abolished?

We challenge three eminent economists to fight their corners: should the UK’s highest tax rate be scrapped?

Yes

Speaking in favour of abolishing the higher 50p rate: Tom Clougherty, executive director of the Adam Smith Institute, and a former director at trade-promotion think tank the Globalisation Institute:

Tom Clougherty

“The 50p tax rate shouldn’t be there in the short-term or the long-term. It undermines economic productivity and prevents people and businesses from relocating to Britain.

It says to a lot of foreign investors: ‘You are not welcome in Britain’, and we are liable to fall back into the clutches of the old class wars where the message was to ‘soak the rich’.

And while also being detrimental to growth, it doesn’t really raise that much money. When the previous Labour government changed the rules, the new, higher rate was forecast to raise £1.3bn in 2010-11, £3.1bn in 2011-12 and £2.7bn in 2012-13.

The Treasury doesn’t believe it will raise much money either. It was introduced by Labour to put the Conservative Party in a tricky situation. Labour’s political ploy failed so we are stuck with this policy and that is a silly and sad way of acting in the country’s ‘best interests’. This is a bad deal all round.

Twenty large corporates moved abroad in 2010 for tax reasons including WPP, Brit Insurance and Hiscox. That’s not only due to the 50p rate, but it plays a big part in the decision-making process.

If it were my decision I would bring the higher rate back to 40p straight away, but in the longer term I would impose a flat tax rate of 20 per cent. That rate would still be progressive, as it would incorporate a personal-allowance system. A lot of European countries have this system, and the policy has many advocates, including George Osborne.

Right now, of the world’s 86 largest economies, only four have a top tax rate higher than ours: Denmark (67 per cent), Sweden (59.09 per cent), Belgium (55 per cent) and the Netherlands (52 per cent).

What I have a big problem with here is when people say that we should keep the 50p rate even if doesn’t raise money, or directly impairs the economy, simply because it might force the rich to pay more tax.

I think that is awful – it’s just a way of passing judgment on someone because they are wealthier. It isn’t economically rational at all. But some politicians keep trotting out this idea of retaining the higher rate as a rational idea. Personally, I think that keeping at its present rate is a pretty crummy way to do business.”

No

Speaking in favour of retaining the 50p tax rate: chartered accountant, economist, serial entrepreneur and Tax Research UK founder Richard Murphy:

Richard Murphy

“While we are still in this time of economic crisis, I would retain the 50p tax rate as it is. But in the longer term, my approach would be to restructure the tax system so that the rich pay their share.

Let’s assume I am a government minister. I would apply national insurance (NI) to all incomes without limits – so there would be no cap on NI payments at £40,000. I would also charge more on investment income – so if you earn more than £3,000 directly from your own savings, unless you are a pensioner, you would be taxed on that at a rate of 12 per cent.

This would have the direct benefit of broadening the tax base and making the tax system fair to everyone, getting rid of a lot of the loopholes and “allowances” that infect the system. If, God forbid, I had been Alistair Darling back in 2009, this is what I would have done. Raising NI contributions would also then let me cut the tax rate on incomes over £100,000 to 40p, and the tax on incomes of between £40,000 and £100,000, to 30p.

But for now we are stuck with the 50p rate, and this band actually works. We know that it works because people are screaming about it – it hurts, and things that hurt are usually doing you good, as we know from visiting the doctor’s.

When people cry out, saying higher taxes are a “disincentive” to work, they are utterly wrong. The same people who dislike higher taxes on the rich don’t mind higher indirect taxes, such as council tax and VAT, which fall disproportionately heavily on the poor. No one actively aims to “work less” because they are taxed more heavily - where is the tipping point where this is supposed to happen. There is no evidence at all that this is true.

Some people say the Treasury will earn less money from the higher rate next year then it does this year. They then use this as evidence that the 50p rate should be scrapped. But we don’t know how much will be earned (by the Treasury). No one can possibly know this figure, and if predictions are based on the assumption that banking bonuses will fall next year - well, so far there is certainly no sign of this happening.

We are entering an era of greater equality, where society will become fairer, a world where growth (in Western economies) is a dim-and-distant prospect, and where we won’t get back to 2007 growth rates until 2017 at the earliest. And this prospect is very uncomfortable for the Conservative Party. But it is also why (Prime Minister) David Cameron knows he cannot get rid of it (the higher tax rate), as we are also moving into a different political era.

So ultimately the 50p move was a political gesture, but an important one. The deficit we are running was created by wealthy people who, in turn, created the crisis from which we are struggling to recover. It’s right and proper that the wealthy people who got us into this hole should help dig us out of it again.”

Maybe

Peter Hahn, a fellow of City University’s Cass Business School and an adviser to the Financial Services Authority:

Peter Hahn

“The 50p tax rate should remain in theory. The sentiment is right. It is a tax on the super-wealthy at a time when (the UK) government is trying to cut its budget deficit. I don’t believe that the higher tax rate will discourage companies from moving to the UK, nor will it make companies leave.

But I would add a caveat. I agree about a higher rate at 50p on the pound, but I would only want to levy it on those earning more than £1m a year, which would mean taxing the super-rich who make the bulk of their income in the UK – and this would only cover 0.1 per cent of the population. 

The problem with the higher rate kicking in at £150,000 is how arbitrary it is. Why not set it at £100,000 or £200,000, for instance?

My solution would be to set the band at £1m as very few people, very few chief executives, earn more than a million pounds a year – so taxing above this level would only mean taxing bonuses, and that seems fair to me.

The rules should also change to focus on taxing UK citizens who live overseas – the Isle of Man, Jersey, Guernsey – yet who retain their links to the UK. Take Guy Hands, the founder and chairman of private equity firm Terra Firma Capital Partners. He moved to Guernsey, but where is his family? In the UK. Where is his company based? Here in London.

And there’s another thought here. For the very wealthy, there are always ways around the rules, and so you are simply taxing higher-earning white-collar workers based in the UK, who aren’t as mobile as the super-rich.

This might also have a long-term impact. In the future you might see people moving to lower-tax jurisdictions such as Asia, where an £800,000-a-year salary is taxed at 20 per cent rather than 50 per cent. That’s a huge difference and that is where the danger lies.”

Readers' comments (1)

  • Nasir Zubairi

    Here are my two cents LondonLovesBiz:

    The following are not absolute measures, but key considerations that should lead strategy for all areas of Government policy.

    1) Slash income tax to a flat rate of 20%
    2) Substantially increase VAT on luxury goods such as Cars, Alcohol and Cigarettes
    3) Semi-privatise NHS and Education, with Gov providing subsidies to families depending on a disposable net income measure
    4) Formalise the UKFI as a proper Sovereign Wealth Fund with experienced professionals who know how to generate returns. Position the SWF properly so it avoids media bashing.

    We need the invisible hand of Government to maintain aspects of society that cannot be fulfilled by personal incentives: national security, care for the elderly, care for the unemployed and disabled, maintenance of streets, roads, etc. However, the Government is extending it’s reach too far and hence their need for revenue is high. In my opinion, Government stopped doing a good job of delivering these society services a long time ago. The NHS is one great example - the return on capital employed, a measure of efficiency in business, is ludicrously low with the NHS and continues to deteriorate.

    I hate the fact that I have no choice in how such a high % of my income is spent, and is spent on poor services. I lost faith in free education in this country a decade ago, likewise the NHS. So I pay for private, and essentially get double taxed. Don't see this as a privilege for the rich - I am not. I, and most of my friends, are state school educated; but we can no longer trust the state to provide a good education for our children.

    We would all choose if we could. So why does the government not let us? By subsidizing the NHS and Education coupled with lower income tax, letting private firms run the services, we get to choose and we can all afford. The services are run better and more efficiently. We lower government expenditure massively. The government does not need to tax as highly to breakeven.

    Lowering tax to 20% and providing freedom of choice, will also deliver a more prosperous and happy population. Keep interest rates low and incentivize expenditure, thus also raising GDP and corporate tax income as firms will see their revenues rise again. Inflation is not as big a disaster as everyone is led to believe, as long as we have the income to manage it, which we would if tax was low. We would still buy luxury goods even if the VAT increases prices considerably - again, we have the income to do so, so tax is being paid through personal choice.

    Low taxes will also incentivize more benefits claimants to get jobs.

    So, lower collections from income tax + higher collections from corporate tax and sales tax balanced with lower Gov expenditure, would, I believe, lead to lower gov debt, as well as growth and prosperity for the UK and its population.

    There is more I can go into, but I think I have written enough of an essay already.
    @naszub

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