How big business got the 50p tax rate wrong

From the Financial Times:

Fears that the 50p rate of tax would hinder recruitment of top executives have been allayed, according to a survey of 50 large companies that will relieve pressure on George Osborne to accelerate plans to abolish the controversial levy in next week’s autumn statement.

Only 13 per cent reported that the 50p rate for those earning more than £150,000 a year was proving a barrier to attracting senior managers to Britain, according to KPMG, the professional services group, in what it said was a “dramatic change of sentiment” since 2009 when over 80 per cent of companies expected the levy to hinder recruitment.

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34 Comments

  • Don’t forget that this is just a survey of 50 large companies. It doesn’t cover small hedge funds, which are much more mobile (Better to have 40p in the £ than 0p in the pound if they move abroad). I am not saying we should scrap the 50p rate, simply that this survey doesn’t tell us whether the rate is harming either British companies in the long term, or tax receipts.

  • JustAnotherVoter 26th Nov '11 - 11:24am

    If execs can demand and get higher salaries in response to tax increases, which evidence suggests they can, they do not bear the burden of the tax. Who then bears the burden of the tax?

    a) customers, through price increases necessary to fund higher gross salaries
    b) other (less well paid) employees, who sacrifice pay rises to hold down companies’ overall costs
    c) shareholders, who get lower returns

    What, then, exactly is the point of the 50p tax rate? There are probably easier and more efficient ways to tax those groups if you think they deserve taxing.

  • Old Codger Chris 26th Nov '11 - 1:25pm

    Does JustAnotherVoter really believe that bosses would stop awarding themselves obscenely high pay increases if the 50p rate were abolished? Back in the day when top tax rates really were ridiculously high – 80 percent or more – bosses’ gross pay was far less excessive in relation to plebs’ pay than is the case today.

    It seems to me that the gap between the 20p and 40p tax rates is too extreme – though I don’t have an answer to that in these troubled times.

  • Malcolm Todd 26th Nov '11 - 3:24pm

    Old Codger Chris:
    “It seems to me that the gap between the 20p and 40p tax rates is too extreme”

    But for employees, of course, there’s no such gap. With a few inconsequential wrinkles, the standard rate of Income Tax + National Insurance is 32% and the higher rate 42%. Doesn’t seem much point to me in having finer graduations.

  • What ‘gets lost in the noise’ is the fact that, as long as those awarding themselves these salary hikes keep harping on about how iniquitous the 50% tax is, they ensure that there is 0% chance that any increase in this rate (no matter what happens) will ever occur.

  • Simon McGrath 26th Nov '11 - 3:49pm

    There are two arguments against the 50% tax rate:
    1) it is immoral for the state to take half of someone’s income except in times of emergency (like now)

    2) It is counterprodcutive as it cost money in the medium term. See this report that also came out this week:

    http://www.cebr.com/wp-content/uploads/50p-Tax.pdf

    @geoffrey – the top 1% earners currently pay 25% of all the income tax, the top 10% over half.

  • @Simon McGrath:
    it is immoral for the state to take half of someone’s income except in times of emergency (like now)

    You’re being a bit dishonest here. The state does not take half of anyone’s income, it only takes 50% of all earnings above £150,000. If someone finds it difficult to live on £150K a year, when people like me live on less than £10K, one wonders exactly what they are spending their money on.

    £150K could sustain me and my family for several years. People who make this kind of money need a bloody reality check as to the way the rest of us live.

  • Old Codger Chris 26th Nov '11 - 5:01pm

    Thanks Malcolm Todd, I stupidly forgot about NI, the hidden income-and-payroll tax.

  • Malcolm Todd 26th Nov '11 - 5:05pm

    Old Codger: Not “stupidly” — that’s exactly what you’re supposed to do! How else could they have people believe that income tax rates have only ever gone down in the last 30 years…?

  • Malcolm Todd 26th Nov '11 - 5:09pm

    Simon McGrath:
    “1) it is immoral for the state to take half of someone’s income except in times of emergency (like now)”

    Why? I don’t see the logic of this claim that you keep making. That it’s immoral to take anything from someone’s income without their consent is an argument I can understand (not agree with; but understand). But the idea that 49% tax is moral and 50% tax isn’t doesn’t seem to make any sense. Perhaps you could explain your reasoning?

  • Chris Nicholson 26th Nov '11 - 5:29pm

    The CEBR study which Simon quotes actually supports the position which the Lib Dems are taking. Even on their challengeable assumptions show that for the next couple of years the 50p rate will raise money. Much of their argument is that income tax has effectively become a voluntary tax for high earners because of tax avoidance through use of loopholes and tax reliefs. That is an argument for getting rid of those reliefs eg higher rate pension tax relief and loopholes. Longer term there is a case that if the 50p rate is seen as permanent it will deter high earning globally mobile individuals which could hit growth and ultimately lead to less tax revenue. But short term there is no convincing evidence that this is the case. What we must do is ensure that the rich pay a fair share- it is in my view unacceptable if income tax is seen as a voluntary tax for high earners.

  • Simon McGrath 26th Nov '11 - 6:40pm

    @Malcolm – you are right of course it would be absurd to argiue that 49% is fine and 50% is immoral. But I do think that when we are in an emergency the state should not take half (or even nearly half) of someone’s income

    @Chris – I don’t have any problem with the 50p rate for the moment. But much of the support for it within the Party is not coming from people who see it as a temporary necessity but from those who wish to punish those who earn a lot.

    To my mind 25% of income tax from the top 1% is a fair share- what % would you want?

  • …………………………………………………………..To my mind 25% of income tax from the top 1% is a fair share- what % would you want?…………………

    Considering that these ‘in need’ 1% awarded themselves up to 50% salary hikes in the last year a 50% tax seems low.

    If you believe that 25% is a fair rate for them what percentage should those on over and less than £37.4K pay?

  • David Allen 26th Nov '11 - 9:45pm

    Simon McGrath fails to point out that 50% is only the marginal tax rate levied on income over £150,000 per annum. The overall rate is of course a good deal lower.

    Under Thatcher, the highest marginal tax rate was 60%. Thatcher’s successors have moved further to the right.

    Simon points out that even though tax rates are now less progressive than in Thatcher’s day, the richest 1% still pay 25% of the tax. All that proves is what a shockingly high fraction of the national income they earn in the first place. And, of course, with clever lawyers and accountants, they get to keep a lot more than they get to pay.

    We have a huge national deficit to pay down. So do most of our competitors. We have tried cutting spending, and it doesn’t work. The US have tried reflation, and that doesn’t work either. There is one thing we haven’t tried, and that is to use the tax system, preferably in coordination with our competitors, to get the money back from the rich people who, by “earning” it through bubble-voodoo economics, caused the deficit in the first place.

  • Jason, you’ve misread Simon McGrath’s comment.

    He’s not advocating a 25% rate for the top 1%. He’s pointing out that the top 1% currently pay 25% OF ALL INCOME TAX. And the top 10% of earners (the bottom fringes of whom are not exactly super-earners) pay over half of all income tax.

    That’s a fairly good reason for worrying about driving them and their money overseas.

  • Ann Keelan…..Thanks, my mistake……

    However, as far as ‘driving them and their money overseas’ this spectre is raised, to order, every time any change ( ‘minimum wage’, ‘regulation’, etc.) is proposed. Yes they do pay tax but, to offset that, whilst ‘joe public’ sees miniscule increments in their salary, those higher up the chain see progressively higher increases.
    How can it be deemed ‘liberal’ (in any sense of the word) to have no aspirations toward a more equal society. Greed, by those with more than enough, got us into this mess and, unless things change, we may live to see the ‘Four Horsemen’ ride.

  • @jason “How can it be deemed ‘liberal’ (in any sense of the word) to have no aspirations toward a more equal society.”

    I don’t think Simon said that either.

  • Bill le Breton 27th Nov '11 - 9:25am

    Can 50% on income over £150,000 be justified by a Liberal? Try regarding tax – all taxes – as a means of collecting a membership fee to belong to and gain from society and to be able to benefit from that society.
    For those who earn their income in that society, income related taxes are really like a market fee which the trader pays for the facilities – the pitch, the facilities, the advertising – but also for the supply of potential customers and their purchasing power.
    Is 50% on income over £150,000 equitable for the barrister who requires a legal system (including legal aid) and all the other hidden costs in bringing her client to her door in need? Why should her income be cross subsidized (if it is under the existing income tax and NI scheme)?
    Of course a large proportion of added wealth enjoyed by those with assets is through the up-lift in their value derived from public works – a socially derived gain which should lead to some contribution from the individual. This is recognized even less than in the case of income tax.
    The trend towards an atomised view of life with the perspective on a false sense of individuality is partially sighted towards those benefits stemming from being a member of the club. Yet the costs of those benefits are picked up by someone and those who pay disproportionally are enerally those who are disadvantaged in terms of exercising their power.
    The more the focus is on the individual and the less on the benefits of living in a society, the harder it is to persuade people that any tax is justifiable.
    Economic liberalism is based on the false premise not only that markets are generally free but also that there is such a thing as individuality. There isn’t. We really are in it together.

  • Good luck with finding a legal aid lawyer who is in the 50% bracket.

  • Ann Keelan…….. Posted 27th November 2011
    @jason “How can it be deemed ‘liberal’ (in any sense of the word) to have no aspirations toward a more equal society.”
    I don’t think Simon said that either………

    He didn’t. I did!………….The ability of ‘those at the top’ to award (and keep) untoward salary hikes has seen the gap between ‘rich and poor’ widen year on year. In this time of “We’re all in this together’ (an ‘obscene joke’, if ever there was one) the gap has accelerated.
    I became a Liberal to push for a more equal society; instead I find myself in one where those unable to find work, the disabled and the sick are labelled as ‘spongers, scroungers and cheats’ by the media mouthpiece of the ruling elite. I am not happy with the values which have grown ever more selfish in the last 30 years…These are not MY liberal values even if some posting here accept them!

  • Peter Chivall 27th Nov '11 - 11:41am

    Bill le Breton summarised the essential difference between those who believe in a cohesive society and seek “to balance the fundamental values of liberty, equality and community”, and those who appear to believe “there is no such thing as society, there are only individuals and their families”. @Simon McGrath appears to believe the latter – the only quote from an individual in the obscure think-tank pamphlet he quotes, is from the Indian beer magnate. I enjoy drinking Tiger beer, but that does not mean I want to import the Indian caste system, arranged marriages, honour killings and beggars dying in the streets which is what happens when there is no common humanity but “only individuals and their families”.
    In terms of the tax system, it does mean the super-rich being seen to paying a fair share of society’s costs. I do not want to return to New Labour times when the bank directors in Canary Wharf penthouse offices were paying less tax than their (usually migrant worker) cleaners.
    Nevertheless I believe the Liberal Democrat Party (not the Coalition ministers) is doing the right thing in moving its policies towards taxing land values rather than income.

  • Joseph Donnelly 27th Nov '11 - 2:24pm

    @ Jason

    The strain of your argument that I want to pick up on is where you stress that your liberal values mean that you want a more equal society and that you became a liberal to push for that.

    Now to my eyes, as someone interested in political philosophy, you should rephrase this a little bit to be consistent with liberalism.

    For a liberal, I think, freedom is key. We can all agree that ‘negative freedoms’ such as the ‘freedom not to be tortured’ or the ‘freedom to not be forced into a religion’ are reasons for a state existing that uses coercive force in order to stop these things happening.

    However, the only liberal justification for pushing for ‘equality’ of any sort that I see (and I also agree with this argument) is that some basic ‘positive freedoms’ are needed in order to be truly free. In other words, you need a decent level of subsistence and education in order to make informed choices freely and hence the state is entitled to coercively tax to maintain an education system (I believe in free museums + galleries etc) and the state can provide a decent level of subsistence, ideally not through council houses and a benefits system, a citizens income would be better, but it will take generations to change out of this messy system!

    Coming back to the point, I don’t think liberals should strive for equality as an end in itself; equality is only something we should seek when it is a complete necessity in order for individual freedom to be maintained.

  • Jason:
    Who are you or I to say that anyone’s salary is “untoward” if we’re not paying it? Surely it’s illiberal for the state to interfere with private enterprise beyond the very necessary and laudable regulation of employee welfare, working conditions, reasonable taxation of profits, health and safety, equality etc. – all of which are designed to support fairness and freedoms.

    If the shareholders of a private company award a director excessive remuneration that diminishes their dividends or is unsustainable, that is their issue to decide… not ours, unless we have a direct interest. As someone else has said, you will reach a point with additional punitive taxation where the salary is inflated to compensate and the cost is passed on to ordinary consumers in the cost of goods. OK if it’s a discretionary purchase, not so great if it’s electricity, bread, toilet paper etc. and the whole sector is at the same game.

    “I became a Liberal to push for a more equal society”… equality of opportunity? equality of ideas, individuals, freedoms? Surely not equality of outcomes, unless I missed that bit of the “liberal” definition. We ought to be focussing on giving the disadvantaged better opportunities, better education and better health and social care. We ought to be making sure that the 1% actually pay the tax they are supposed to pay under the current regime, not obsessing about whether they “deserve” it.

    “The disabled and the sick are labelled as ‘spongers, scroungers and cheats’ by the media mouthpiece of the ruling elite.” Yes, but unfortunately they tend to reflect the majority opinion among the non-liberals in our society because the media are adept at giving the public what they want. Spend 5 minutes on the Daily M*** website and you’ll find that there’s more right-wing bile and outrage coming from the public comments (presumably not many of them being the ruling elite) than there is from the editorial content.

    And I don’t think that there’s any correlation between the shabby and negative stereotypes of the poor in the popular press and any sort of support for keeping top-end taxes at a particular rate. The Daily M*** readers hate benefits claimants and bankers in equal measure.

  • David Allen 27th Nov '11 - 7:17pm

    “the only liberal justification for pushing for ‘equality’ … is that …. you need a decent level of subsistence and education…”

    Oh, wonderful. Our great party draws the line at letting people starve in the streets!

    “it’s illiberal for the state to interfere with private enterprise beyond..”

    Here we see a definition of liberalism as the compulsory adoption of right-wing laissez-faire policies, and the prohibition of any effective action to reduce social inequalities, beyond the strictly limited objectives of “giving the disadvantaged better opportunities, better education and better health and social care”. In other words, provided we’ve taught everyone to watch out for leopards jumping out of trees, it’s OK to apply the law of the jungle. (I could call this Victorian liberalism, but I suspect that would be unfair to the Victorians.)

    May I remind the last two posters that we are the Liberal Democrat party because of our merger. We took on board the philosophy of social democracy and made a commitment to fairness and to action against the gross inequalities in our society. We understood that when the rich gain more power, the “disadvantaged” never gain “better opportunities”. The reverse happens, as we see with Osborne’s attacks on disabled benefits. That is why true Liberal Democrats cannot be “intensely relaxed” about rich people getting richer.

    A simple question for Joseph Donnelly and Ann Keelan. Inequality in Britain has risen sharply over the last 30 years, despite the lip-service commitment from all three parties to reduce it. What is your attitude to this? Are you delighted, unconcerned, or worried?

  • “True Liberal Democrats”? I was unaware that you were sole guardian of the faith, David, but next time I’m unsure of the pure, approved Liberal line, I will be sure to check with you first before being so illiberal as to have my own opinion.

  • Bill le Breton 28th Nov '11 - 9:28am

    Ann, a small point but I do think that the £150,000 + barrister, although not (or no longer) directly dependent of legal aid, is indirectly dependent on a system or mecahnsism which in part is supported by legal aid – again it is the difference between focusing on the individual and not seeing that individual within a social system. The society that tolerates the very high earner does so because the less powerful benefit from other tax funded services and facilities.

  • Joseph Donnelly 28th Nov '11 - 1:51pm

    @ David Allen

    Well of course I am liberal not a social democrat, although I’m happy to be in the same party as social democrats under a FPTP system and I respect their views and obviously a lot of the time there are policy issues inside the party where they bring useful thing to the table.

    To answer your question on inequality.

    I am only concerned with the rising inequality if those at the bottom and middle haven’t had their lives improved since. Now pre-crash I think everyones life did improve across society (pretty much) but since the crash, I am deeply uncomfortable with the way banks were bailed out; the way the rich occupy a protected place in our society. I would however argue that this protected position comes from very anti-free market positions of past govts. and the present that makes those rich people stay rich and get even richer while growth isn’t happening elsewhere. Answer your question satisfactorily?

  • David Allen 28th Nov '11 - 6:41pm

    Joseph,

    Well, clearly your answer is nuanced, polite and thought-through, for all of which reasons it deserves respect. I’m still struggling with it, though.

    You begin with “I am only concerned with the rising inequality if those at the bottom and middle haven’t had their lives improved..” but then follow with the seemingly contradictory “I am deeply uncomfortable with the way… the rich occupy a protected place in our society.” Well, my own view is that poverty and privilege do indeed go hand in hand, and that to attack the one you have necessarily to attack the other. (Jesus got there first, of course!)

    Then “I would however argue that this protected position comes from very anti-free market positions of past govts.” If I understand this correctly, you’re suggesting that Gordon Brown practised state intervention to shore up the rich and the powerful, and you don’t like that. Well, I am happy to agree that just because social democrats believe the state can play a helpful role doesn’t mean that it always does! That’s where the “liberal” side of our merged party should come in, insisting on a vigorous democracy to give people effective oversight of state power, and thus making it more likely to be used in the public interest than in the vested interest, for good rather than bad ends.

    Finally “and the present that makes those rich people stay rich and get even richer while growth isn’t happening elsewhere.” Sorry to end on a bathetic note, but I just couldn’t work out what you were saying there – could you have a retry, please?

  • Joseph Donnelly 28th Nov '11 - 7:41pm

    @ David Allen

    Happy to clarify and glad to see we can have this debate in a polite way!

    I don’t think the two points are contradictory. By protected place; I mean the state has intervened in ways that mean that the rich are holding their ‘rich’ position not through free means but through illiberal govt. intervention. For example; the concept of limited liability with banks. Investors with capital have been able to invest in banks and get a high return on their investment but then when the banks rack up huge debts those rich investors are not liable for those debts because of limited liability.

    I haven’t actually explained that particularly well again…but I guess the point can be simplified to…I don’t care how rich rich people are as long as they aren’t rich because they have got special privileges from the state or any other coercive system and that the rest of society is being dragged along with them even if they are getting richer at a faster rate.

    Yes I know that social democrats obviously don’t think the state will always do evil, I’m sure all social democrats in this party aren’t comfortable with half the stuff our state does. However; my perspective is that when the state acts it acts like a large disorganised corporation that is very likely to be perverted and captured by small highly motivated interest groups rather than serve the general good. But I am comfortable with then notion you suggest that where the state is acting then more rigorous democracy and transparency will in general cause it to act better, or at least less bad.

    I guess where the divide between us lies probably won’t be as clear as the words ‘social democrat’ and ‘liberal’ make out. My position can be summarised as: I only want equality where it directly effects negative freedom and in practical terms I think that means the free market will be better than state intervention most of the time but I still believe a reasonably sized state is necessary but I think the state in the UK today is too large and interferes too much.

  • I was skeptical about the 50p tax rate, thinking that would do little and may even have had a negative effect . It ‘s now fairly obvious that the thrice woe argument was just hot air. Actually. I now think that graduating tax for earnings over £200,000n per year at up to55% to 60% would do more good than harm.

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