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Cloud cuckoo tax

August 1st, 2011 Posted in coalition, Tax by

On Sunday the Liberal Democrat Chief Secretary to the Treasury, Danny Alexander, echoed the Business Secretary, Vince Cable, that the 50p income tax rate, introduced by the previous Labour government, was unlikely to be scrapped anytime soon. Those saying otherwise, principally Conservatives, were living in “cloud cuckoo land”. The priority of the Coalition government is and remains to deliver tax cuts to low and middle income earners. The rate though could be reviewed in future.

In one sense, the political, Alexander and Cable are absolutely right, the politics of reducing tax on elites is generally poisonous, particularly so in the midst of a stagnant economy, particularly for the Liberal Democrats. To be achieved, politically, it would need to be part of a balanced package to generally reduce tax for everyone. Margaret Thatcher’s governments, for example, reduced all income tax bands, in steps, not just the top rates.

Economically I’m less convinced. The 50p tax rate like all high marginal taxes distorts incentives against work and growth. Highly mobile, highly able professionals, investors, and entrepreneurs can better choose where they work than others. They will be influenced, over time, by relative tax rates, alongside other factors. It is heroically naive to make good-will, inertia, and patriotism the basis of tax policy.

Further whatever the alleged benefits of high taxes in respect of fairness, supporting infrastructure and other public goods, most are benefits that do not make a lot of difference to those expected to foot the bill. There is little evidence that high tax rates raise more money.  

High income tax is an experiment the UK has tried before, concluding an economy that needed an International Monetary Fund bailout in 1976. The tax take, and share of the take, from high earners increased substantially after the top rates were reduced in 1979 and 1988.

The 50p rate, to some extent then, is a cloud cuckoo tax. It will be scrapped eventually. The question is when the political circumstances will be right.

One Response to “Cloud cuckoo tax”

  1. Bolivia Newton-John Says:

    In these straitened times I don’t find the arguments for abolition of the 50% rate specifically that compelling (outside the general argument that all income tax is immoral and economically harmful) as there are people who are desperately suffering through no fault of their own, and by definition these people are not.

    HOWEVER I am awaiting with interest the findings of the report announced by Osborne as to whether this tax band is actually bringing much money in. It’s easy to imagine that it is not, due to the Laffer effect and the ability of the wealthy to manage their tax efficiently. If this is indeed the case, then there is no justification for that tax band and the harm it causes, it would just be the politics of envy, so it should be scrapped. Pragmatic considerations, as ever, should have primacy.