Why scrapping the 50p tax is wrong
If newspaper reports are to be believed, the 50p tax rate is toast. Britain is apparently set to show she’s ‘open for business’ by endorsing the view that as the rich get even richer the rest of us benefit from the growth and investment that their spiraling incomes and additional effort bring.
In contrast, the campaign in favour of retaining this tax rate rests on the belief that there is ample scope for the best off to make a greater contribution without their wealth creating activities being curtailed – and that a fairer and more progressive tax system would bring wider social and economic benefits.
Not surprisingly, I’m in the latter camp. And while of course I recognise that the 50p rate is very far from the only move necessary to achieve a fairer system, and that it may not even be the most important of the many changes we need, the decision that is taken on its retention will provide a significant indication as to where the Government’s views on this important debate lie.
It is not hard to build an evidence based case in favour of retaining the rate.
Firstly, it is not as high as those arguing against it claim. Those in the 50p tax rate already benefit from reliefs and allowances that benefit them to the tune of an average £15,000 a year (more than half of women working in the private sector earn in a year). And, although it shouldn’t need pointing out, the 50p rate is only payable on income above £150,000. So the actual effective tax rate of most of those who pay it is significantly below 50%. As Richard Murphy has shown in this comprehensive TUC report, a person with taxable earnings of, for example, £160,000 has an overall income tax rate of 36% whilst a person with taxable earnings of £1 million pays 47.8% of their income in tax.
Particularly given this, it’s hard to see how it can be significantly reducing the amount of effort people are putting in. As I have previously shown, millions of lower paid workers go to work for far less pay as well as losing a far higher proportion of their income as they move from benefits into work. And as Ian Mulherin of the SMF has pointed out, the net income per hour of work for the very top paid is far higher than these workers would have received ten years ago for equivalent hours and effort (over the 14 years to 2010 the incomes of those in the top 1 per cent rose by 56 per cent, more than twice the speed of those on median incomes and clearly far faster than inflation).
So if the 50p tax does fail to raise significant revenues, there is simply no evidence that this will be a result of rich people deciding they can’t be bothered to work hard.
It also won’t be because they have left the country. Again, as Richard expertly showed in our recent report, 59% of those likely to pay the 50p tax rate are employees. The only way they could move abroad would be if their employers all left the country too. Another 21% of those in the 50% bracket are self-employed, mostly in professions where relocating a career is difficult: a knowledge of regulation (whether it be in law, accountancy or another field) or a license to practice (e.g. in medicine) is very often the basis on which these people can make such high levels of income – moving overseas while retaining their jobs isn’t an option. And even some of those supposedly living on investment income, making up almost 17% of the 50p rate taxpayers, may not be as mobile as the description suggests: many will be receiving that income in the form of dividends from their own companies that they manage in the UK and others will have family ties that make moving overseas unattractive.
The 50p rate may or may not be found to raise money – but if it doesn’t this will still leave us far from an endorsement for the view that we can never have a fairer tax system or that a 50p rate can never work. Leaving arguments about how the impact of the tax is measured aside (and the TUC will be looking carefully at HMRC’s report to understand the assumptions they may or may not have made with respect to the tax’s revenue raising potential) Government data shows that in theory there is scope for the rate to raise more than the initially estimated £3 billion a year. If this doesn’t happen, it will be because there are fewer taxpayers in the bracket than HMRC originally anticipated, or because income has been taken early, deferred (for top tips on how, helpful advice is provided by Freshfields), paid into personal service companies (until such time as the tax rate is reduced) or paid in shares and then instantly sold (therefore only incurring capital gains rather than income tax – as per the Mirror’s report on the activities of the rather unbelievably named ‘Rich Ricci’). So whatever the reasons behind the tax’s estimated impact, lower than expected revenues won’t be because rich people stopped trying.
The very fact that it seems likely some high earners will manage to avoid the rate demonstrates the need for wider tax reform. While a clear indication of the tax’s permanence would likely go some way to increasing the income it raises, others wider measures including a comprehensive anti-avoidance principle and alignment of capital gains and income tax rates would also boost its scope to raise cash. So regardless of what happens with the 50p rate on Wednesday, far wider debates on tax reform will continue. Income inequalities in the UK are reaching levels not seen since the industrial revolution and it is our future economic success as well as our ability to build a fairer society that depends on closing them. A more progressive tax system will play a key part in enabling us to get there – and even the retention of the 50p tax rate would only be a small stop along the way to its achievement.