From the TUC

What are the arguments against scrapping the 50p tax rate?

27 Sep 2011, by in Economics

For now, debate about the 50p tax rate has died down. But the infamous ‘letter from economists‘ calling for it to be scrapped sounded the starting gun in the battle for public opinion over the rates’ retention (a battle which, incidentally, You Gov finds those who want it kept are winning).

As the issue seems likely to boomerang back into public debate before long, I thought I would set out the arguments that I deployed when making the case for it to be kept. There are probably many others – please let me know!

While we don’t yet know if the 50p tax is raising money the Treasury forecasts, which are based on a model which takes account of some taxpayers taking avoidance measures, estimate that by 2014/15 it will raise a cumulative £12.6 billion. This is not an insignificant sum, equivalent in fact to more than the entire annual cost (by 2014/15) of the Government’s social security and tax credit cuts. This cash is badly needed. If it’s being collected then losing it will likely lead to further cuts, and if it’s not coming into the Treasury then presumably greater anti-avoidance measures are needed to close down the loopholes.

Some argue that people will not simply avoid rates, instead they will leave the country or stop creating as much wealth. But there is no evidence of large-scale migration from the UK as a result of higher tax rates, despite lots of people being keen to discuss their intentions few seem to follow through on the upheaval of moving their entire families abroad where, as Alan Manning points out, changes in exchange rates are likely to affect their incomes far more than tax rates.

Similarly, the argument that a higher marginal tax rate will reduce job and wealth creation doesn’t stack up: most of the 1% of workers (328,000) paying the tax work in finance or are in senior posts in large corporates, very few are small businesses (who will be classified as limited companies and so have lower tax rates in any case) and in many cases the effective tax rates of eligible workers will (as the TUC showed in The Missing Billions (pdf))  be lower as a result of the high level of personal tax avoidance in the UK.  The idea that those who do invest in jobs and growth in the UK are driven by whether or not a small number of their employees will have to pay a 50% tax rates on earnings above £150,000 is also misguided: as the Government’s own evidence shows inward investment is dependent upon a huge range of factors including support for R&D, the strength of the UK’s universities, the skill base of the population and the likelihood of long-term returns in the chosen investment industry. The potential tax rates for corporate CEOs don’t feature as a determining factor.

As Alan Manning further pointed out in the FT (£) it also seems odd to assert that marginal tax rates, rather than incomes earned, affect incentives to work. Those earning over £150,000 (many of whom will have earnings significantly above this level) are still very well remunerated, even at a 50% tax rate.  It’s also interesting to note that the Government’s plans for Universal Credit rest solely upon the idea that marginal deduction rates of 65% will provide significant work incentives for unemployed people claiming benefits. I don’t buy the logic of this argument – but it does seem odd for Ministers to be simultaneously suggesting that people earning £200k a year will work less for an additional reward of £25,000 (50% of the £50,000 above the first £150,000 of their earnings) compared to £30,000 (their additional income at a 40% tax rate), while unemployed workers on minimum wage will apparently be highly motivated to move into full-time work by an income of around an additional £100 net a week.  Perhaps, although Ministers on a mission to transform the labour market with UC may not believe it, motivation is significantly more complex and based on more than marginal returns.

Manning also highlights the separation between performance and rewards at the top of society: put simply the existence of a significant relationship between effort and rate of return is undermined by the growing divergence between executive pay and performance. Recent research for the High Pay Commission (pdf) showed that in the past ten years, the average annual bonus for FTSE 350 directors went up by 187% while the average year-end share price declined by 71%. This suggests that while the amount of effort being put in has shown little change, rewards have rocketed. Presumably earning a little less will not, in these circumstances, therefore have a significant impact on performance – for those on the top salaries evidence suggests there simply isn’t a significant link.

And finally there is, of course, a strong case for progressive taxation where the richest pay a higher proportion of their incomes in tax than those who are worst off. Those who are the best off have higher overall incomes so (particularly at the moment when public spending it tight) it is fairer that they pay more. This is not the politics of envy, it is recognition that we all need to make a fair contribution to the social goods upon which all our livelihoods rely (the roads, hospitals and police forces which markets need to function) and and that individual effort is not the only factor responsible for determining what we earn – our skills, the opportunities we have as we grow up and also pure luck also play a significant part.

When the political right ask whether this view justifies any inequalities at all, best to return to philosophy. Rawls (hat tip to my colleague Richard Exell for refreshing my political theory) is right that permissible social and economic inequalities are those which ‘benefit the least disadvantaged the most’ – so some inequality is necessary to ensure motivation and reward hard work and prevent overly high taxes limiting productivity (and therefore output for all of us, including the worst off). But, for all of the reasons outlined above, we’re a long way from that point just now. The UK could be significantly more equal before the worst off start to lose.

And there is also a strong economic case for greater equality. As the TUC set out in this research (pdf) by Howard Reed while the conventional economic view asserts that inequality is a price a country has to pay to achieve economic success, a comparison of the performance of equal and unequal countries does not back this up. There is also evidence that some redistribution enhances economic performance – as health and educational outcomes improve and social mobility rises, better enabling society to make use of everyone’s skills and talents.

The bottom line is that most people in the UK (78%) think the gap between the rich and poor is too high. It is. The 50p tax rate is a small way to make it better, while making our country both fairer and more economically efficient. The fight is on to keep it.

2 Responses to What are the arguments against scrapping the 50p tax rate?

  1. Quietzapple
    Oct 2nd 2011, 8:19 pm

    Excellent!

    The Whig whom Tories faksely claim as their own Pitt the Younger who introduced Income Tax here brought in three rates: progressive from the start!

    Not only is the 50p rate driving people out, the much vaunted lowest corporation tax in the advanced economies which Cameron boasts of doesn’t seem to be attracting many corporations either. A VAT cut and more demand might do more to keep people here And attract companies.

    Cameron claims he has an economic growth plan: it must involve a lot of pigs because his grunting truly expresses his porkies most adroitly.

  2. Quietzapple
    Oct 2nd 2011, 8:20 pm

    The 50p rate is NOT driving people out of course, typo.

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