Opinion: abolishing the 50p tax rate makes no economic sense

Slower than anticipated growth has seen a rush of commentary proposing changes the government need to make to ‘deliver growth’.

If there is one macroeconomic lesson which should be learnt from the 2008 crisis it is that not all growth is good. It is relative easy to manufacture a bubble, call it growth, and claim to have “abolished boom and bust”.

Sustainable growth is much harder to achieve, but one idea unlikely to achieve it is the proposal by some Tory commentators to abolish the 50% tax rate.

There are probably strong moral and political arguments for and against the abolition of this rate, but the purpose of this article is to focus solely on the economic arguments for and against.

As Liberals, we generally oppose supply side economic solutions on the basis that they don’t work on their own, and are so expensive that the usually use up all the money for the demand side solution which might work alongside them.

Supply side economics means increasing the supply of money avaialble to individuals and businesses for people to spend and invest, but ignores the fact that people may, for various reasons choose not to spend or invest in economically productive activities when you do supply it to them.

Cutting the 50% tax rate is using the tax system to increase the supply and it is likely that any growth it delivers would be very strictly short term and the prelude to another bubble.

The 50% tax rate is paid by those whose earnings are above £150K a year. The reality is that no one in that salary range should have a problem with immediate consumption, if you give them more money to spend every week, the likelihood is that they will save the money, rather than spend it on satisfying an immediate need, and if they don’t spend it then it doesn’t generate economic activity or growth.

It is also a cathch-22 that the less confidence people in all income brackets feel about the economy the less likely they are to spend money, and since higher earners have less ‘need’ to send the money they are less likely to spend it.

During the ‘boom years’ higher earners ploughed their surplus cash into acquiring ‘buy to let homes’, this forces prices up and thus rents up, contributing more to inflation than to growth.

Those who advocate abolishing the top rate of tax argue that it will help create jobs by pushing salaries downwards and help retain existing talent within the country.

However, the current rate of inflation and worldwide economic uncertainty means that investors have little enough confidence in the market to invest in it, so the relative benefit so its hard to quantify what firms are likely to hiring people on salaries above 150k in large numbers at present, A great proportion of the UK workers in the highest tax band are in the financial services sector, which is shortly to embark on a fresh round of job cuts.

Cutting the taxes of the poorest on the other hand, is likely to be of more economic benefit, as this demographic are likely to need the extra money to carry on with day to day consumption, meaning the money will go back into the economy and deliver growth, in a way that cutting the taxes of the highest earners wouldn’t.

It may well be that the economy one day gets to a position where there is economic value in abolishing the 50% rate, but that day looks to be far in the distance at present.

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32 Comments

  • “As Liberals, we generally oppose supply side economic solutions on the basis that they don’t work on their own, and are so expensive that the usually use up all the money for the demand side solution which might work alongside them.”

    This is not generally true at all. Any liberal economist would accept that both supply and demand tools are part of any fiscal policy.

    I don’t have a strong feeling on the 50% tax rate (I think I would suggest it be abolished once economic growth has returned), but you’ve not addressed the main argument in favour of its abolition – a country’s top rate of income tax is a signal within the international community as to how attractive it wants to be to international capital and talent. Whilst not entirely fair or accurate, countries which do want to be open will make an effort to have low to moderate top rates – and so the UK isn’t doing its investment climate any favours by being what I think is currently the developed world’s third highest rate (behind possibly the Netherlands and Sweden?).

  • @Joe Otten:
    There are sound economic reasons the rest of the world is moving towards lower top rates.

    Sound reasons why those who have more should not contribute a fair share? We now have a situation where those on the bottom pay more in tax than those on the top. The gulf between rich and poor is getting larger. Markets are crashing. Wealth is not trickling down at all.

    If we still had rates of taxation like we did in the 60s, maybe we would not have such a huge deficit and gulf between rich and poor. We have just spent 30 years in this country with a free market that is impovershing those on the bottom even further while those on top enjoy the lowest tax they have ever had to pay.

    But I don’t expect many LibDems to understand poverty at all. You are now the party who is telling those who cannot afford heating in the winter that “the markets” will solve everything. I never, ever had to choose between heating and food when energy was nationalised and run for the good of all rather than profits for shareholders.

    How many of you have experienced poverty, being unable to afford the food you need, having to skip meals to make sure your children can eat? It really does make me sick that no party really wants to do anything radical to help the poorest. I am sick of our profit-driven, me-me-me and everyone for themselves society.

    Why can’t some things just be run for the public good? Why does EVERYTHING have to be a race to the bottom and fight for ever-increasing profits? How about providing some decent jobs that were never replaced when companies move overseas?

  • Daniel Henry 12th Aug '11 - 5:25pm

    @ Simon
    I heard that they could take part of their pay in shares which when sold would be taxed at the capital gains rate. It’s that one of the loonies that haver now been closed?

    How much does the 50p rate raise a year? Even if it’s worth getting rid of, I still think it’s worth using to barter with the Tories for an equivalent LDV tax. 😉

  • @jedibeeftrix:
    The 50p rate is nothing more than a viscious and punitive tool of social of social-engineering, and i sincerely hope anyone foolish enough to support it at least has the decency to admit to the whacking great chip on their shoulder.

    That “chip on my shoulder” is working as hard as I can while disabled and still being unable to keep myself and my children warm in the winter time. I work harder than most of these bankers and politicians who are telling me it is right they should contribute less than poor people do.

    If it is “socialist” to want the rich to pay more into the country that allowed them to become rich via our infrastructure, then I am guilty as charged. If it is socialist to want an equally strong public sector to protect us against the excesses of capitalism, then count me in. And, sir, if it is “socialist” to see the moral bankruptcy of letting the rich get off lightly and make excuses for their tax evasion, then you’re even behind what people at the Torygraph now think:

    http://blogs.telegraph.co.uk/news/peteroborne/100100708/the-moral-decay-of-our-society-is-as-bad-at-the-top-as-the-bottom/

    How very dare you tell us we should let those with millions pay even less tax while I can’t afford all the food I need. Have you ever had to choose between heating and food in wintertime, sir? I will not take any lectures from people who have plenty telling me I should have less and be thankful for it.

    I actually hope the markets do crash. I’ve nothing to lose. And then maybe we can build a society that is more fair and where the rich do not act as if they are immune from all social obligations that both Tories and Labour have released them from.

  • The most important factor in determining whether to keep the top rate at 50% is seeing what other countries are doing and whether people can avoid this easily. Very many people on this kind of money set themselves up as a company and avoid most of this tax quite openly. There is no point setting a rate of tax so far away from what a company pays and allowing people to avoid the rate so easily.

  • Sue Sutherland 12th Aug '11 - 6:26pm

    I definitely agree that the 50% income tax rate should stay and am concerned about any more quantative easing. Please can those more experienced in economics start thinking the unthinkable as we are in unchartered waters. I would like the party to seriously explore raising inheritance tax rather than reducing it as some Tories would like. If care was taken over tax avoidance I believe that this would encourage the wealthy to spend their money and that this would help economic growth. We should still reduce income tax for those on lower incomes. If this raised more revenue can I put in a plea for social housing as not only would it help address inequalities in society but also provide many training opportunities for those who need jobs. I also believe that it’s time to do away with universal benefits. If the tax system was better administered it should be possible to implement a previous Lib Dem policy of an integrated tax and benefits system without the horrors of means testing.

  • I find it flabbergasting that, when many people on low incomes are suffering hardship, LibDems are suggesting cutting the top tax rate. Shouldn’t the priority be to cut tax for the less well-off?

    As for Jedibeeftrix’s claim that “anyone foolish enough to support it at least has the decency to admit to the whacking great chip on their shoulder”, presumably this applies to Danny Alexander, who said the other week that anyone suggesting cutting the top tax rate was in “cloud cuckoo land.”

  • Whilst I actually agree with lowering the higher tax rate, purely because it doesn’t raise any additional revenue, I do think that capital gains tax and land value taxation should be uncreased. The real problem of inequality in this country which stifles social mobility is that of hoarding of wealth, usually unearned, and typically in the form of land and property. That drives up prices.

    Still, seeing some of the knee-jerk supposedly ‘lib dem’ posters above, lowering the tone of debate, railing against social democracy and descending into tribalism, it frankly isn’t suprising that the polls suggest the party doesn’t command more than 9% of the vote.

  • with reference to land value taxation, I meant it should be introduced.

    In equality Income, per se, isn’t a massive problem. Where levels of income are massively unequal, as in our modern societies, there tends to be deeper problems at work causing the inequality. In our case it is the fact that corporations and markets are essentially allowed to hold our governments hostage and make ever increasing demands of them. You are not allowed to tax the ‘wealth creators’ (i.e. wealth shifters) as jedibeeftrix calls them, whilst corporations demand that they should be allowed to pay their employees less and less and that they shouldn’t be expected to train them either. We are competing with slave economies such as China and the ‘wealth creators’ are using this fact to extort what they want from western social democracies. That is why there is an increase in income inequality, because anything which would counteract this is immediately vetoed.

    Inequality of income is also dangerous for the economy from a demand perspective. If all the wealth travels upwards then eventually we reach a crisis of demand… which is exactly what we are seeing at the moment. For ten years prior to the crash cheap credit was substituted for rises in wages, meaning that demand was boosted in the short term by encouraging borrowing.

    Those who hate the idea of wealth redistribution are usually ignorant from both an economic standpoint and also ignorant of the chief moral argument, which is that of dimishing marginal utility and has, in fact, long been held laissez faire capitalists. As a rule the more of something that someone can afford, the less use they get out of it, meaning that wealth is more beneficial from a utilitarian perspective for the poor than the rich. it also means that the rich tend to spend less, which in the long term lowers demand and in fact endangers the whole economic system- which is where we are right now.

    It is frankly worrying to see such liberal Keynesian views, widely held amongst economists, derided by supposed liberals here as ‘socialist’. It appears theshort-sighted and selfish are beginning to wheel out the old tired and rebutted pre-Keynesian arguments yet again.

    All that said, going back to the beggining, raising taxes on income is usually both inefficient and less productive than raising taxes on wealth. Taxes on wealth are less easy to avoid (although there are often loophole), they do more social good (they reduce the social advantages given by wealth as well as act against the distortions of the market created by the concentration of wealth), they encourage people to spend (increase demand) and wealth on the whole, in this country at least, is largely unearned or earned with exceedingly little effort (it is also mainly not ‘created’ but tends, through property and rent, to be distributed from the poor to the rich) whilst for the most part income is earned with effort.

  • Simon McGrath 13th Aug '11 - 5:56am

    @Daniel “@ Simon I heard that they could take part of their pay in shares which when sold would be taxed at the capital gains rate. It’s that one of the loonies that haver now been closed?”

    Daniel -definitely can’t do that, indeed has been closed for a long time. If you make someone a grant of shares when they ‘vest’ ie become there’s they pay income tax and NI. After that individual would pay CGT on any gains (when they sell the shares, but that’s no different from anyone else who buys those shares.

    @Alastair “Very many people on this kind of money set themselves up as a company and avoid most of this tax quite openly”
    There are a vast array of anti avoidance measures to stop this.

  • david thorpe 13th Aug '11 - 11:25am

    thanks to allf or the comments.

    @ kjed
    I have some sympathy with the argumenst you out forwrad, but they are moral rather than economic in nature, and the purpse of this article was just to focus on the economic.

    @ peter
    your right there always need to be an element of supply side in any policy, and there is some in the current policy, the purpose of this article is tro discuss the option to achieve growth from where we are now, and many have put forwradscrapping the rate as part of that, which means an additional supply side method, which I think would get the balance wrong between the amount of supply side and the amount of demand side needed.
    @ alaistair
    you are correct that lots of peoplpe do use avoidance measures such as that, but I think that enough of them would could to do that @ 405 as do it at fifty, rendering the economic benefits very slight indeed because ht e main way to minimise your tax is to defer consumption, which is the very thingw e need to avoid now
    @
    john
    no one is parlaiment is suggetsing it….the priority is to lift the lower earners out first.

    in relation to argment made about attracting talent, as I mention in the original article…….much of the talent the uk has attracted has been in the finaincial sevrices sector, which is cutting jobs, not creating them, so I dont know where the pool of talent is going to coem from to move here.
    AS for attracting people with those sorts of earnings in other sectors…..other sectors are less economically mobile than fiancial sevices and therefore need many other things to happen to makje them want to come to an economyt, they havent been coming to britian for years in any sector other than financial sevices and we need to address thew reasons for that rather than simply assume that its the tax rate that keeps them away…..

    @ thyechristophe

    ist not an excuse for a command economy, what you need to do is create the demand, rather than the supply, yous till arent making people spend the money rather you are creating the conditions in which they are more likley to have the confeiidence to spend…..just giving them the money and hoping they will spend it…or utting taxes to drive wages down and employment up doesnt work…as was shown by the great deporession by Keynes who created the concept of demand side stimulus…and he was a liberal peer rather than an advoacte of a command economy

  • Daniel Henry 13th Aug '11 - 2:03pm

    How much DO we raise on the 50p tax rate? People keep dating it doesn’t raise much but I’d like to see figures.

  • coldcomfort 13th Aug '11 - 2:17pm

    It so happens that I have a lot of contact with wealth creators. They are the small businesses who take on one or two extra staff because they are successful & none of their directors earn £150k plus, or anywhere near. Banks & big business are not wealth creators. Banks are shedding staff like mad & not lending to the little man who is creating wealth except at silly rates & after making them jump through hoops. The big five supermarkets are screwing their producers & destroying local community wealth. Along with many others who make [seldom truly earn] £150k plus the 50p rate is no hardship at all. Arguments about it being a deterrent to inward investment & initiative are nonsense. If it doesn’t raise much money perhaps it should be raised. In these hard times there is certainly an argument for an 80p rate of tax [temporary at this level I would agree with] on any greedy individual who is remunerated by any method at a rate in excess of half a million a year. Then we might get a little closer to ‘all being in it together’ .

  • david thorpe 13th Aug '11 - 4:07pm

    , at this stage of the economic cycyle and bearing in mind what the opportunity costs of abolition are, it is an efficient tax.

  • The Treasury reckons it brings in about 2.4 billion but exact figures won’t be known till they conclude their review. I happen to know a lot of entrepreneurs in tech startups – wealth creators if you will – not one of them is concerned about the 50p rate, what they care about is securing investment. A large proportion of people paying this rate are bankers – wealth destroyers. We’ve spent 30 years trying to make the top 1% of the population richer. Doesn’t seem to be making for a good or indeed wealthy society.

  • Daniel Henry 14th Aug '11 - 4:11am

    @ Simon
    Cheers for the info about the “shares as payment” loophole being closed.

    Hmmm…
    I’m still open minded as to whether we need this tax or not. So far the biggest argument against it is that it doesn’t raise a significant amount. Wouldn’t that be solved by lowering the threshold even further so more people pay it? Or by raising the rate on particularly high earners?

    @ Tom
    Even if it provided the disincentive that you claimed it does, I’m not sure I adhere about the negativity of the effects.
    E.g. If that surgeon cut their workload, wouldn’t that open up the market to other surgeons? Wouldn’t that mean there read an increase in job opportunities?

    There’s a limit of the money available through market demand. Surely if a few have exceedingly high shares of it then it’s st the expense of others having the opportunity?

    I don’t see how it’s a survey on businesses either. Income tax is on individuals rather than businesses. It will only affect the wages or drawings/dividends of individuals. I don’t see how the excessive payment of individuals is necessary for good business.

    Wasn’t there a study that showed earnings beyond £50k have no effect on happiness? (or was it £70k?)
    Either way, salaries of over £150k are unnecessary and also take away from the opportunity of others to earn.

    For that reason, isn’t the 50p rate at worst pointless, but at best giving us an extra 1-2bn? (funding the cost of the pupil premium)

  • Daniel Henry 14th Aug '11 - 12:38pm

    ” Only if one assumes that there is a set amount of labour required, and if one person stops working another can take up the slack. In fact, one person working less is merely one person working less – an overall decline in economic output.”

    In.’m not sure about that. The current economic climate has more workers than there are opportunities. We now get graduates having to fight for jobs that only require GCSE’s (where I live anyway)

    There might be one or two areas where there aren’t the skills to fill the gap but I expect they’ll be on the minority.

    ” I do not believe that we should be seeking to maximise happiness; we should be maximising people’s freedom to pursue happiness by whatever means they wish.”

    I sort of agree with this and if leaving excessive pay had no impact on the freedoms and opportunities on the rest of society, and if the taxes weren’t required to uphold freedoms then I’d be happy for people to earn as much as they like tax free. But I don’t think that’s the case.

    ” If that were the case, why not charge 100% on incomes over £150k?”

    I’m not against it in principle butt for the reasons you gave it’s entirely impractible.

  • david thorpe 14th Aug '11 - 1:40pm

    one person working less means less economic activity and theregore less growth and less jobs for someone else…….quite simply there is a fixed amount of labour that is essential and will happen one way or another……then is more discretionary labour…where people try somehting new or different….and generate fresh economic activity that way……
    @ andrew r if it brings itn 2.4billion thats an enormous amont..not all the loopholes have been clsoed…….but several have

  • Daniel Henry 14th Aug '11 - 6:44pm

    Tom, if there was a shortage of surgeons, or any other skilled employees then you’d be right, but the impression I get at the moment is that, especially with the economic climate being as it is, that there is a surplus of skilled workers and a lack of opportunities for them.

    You might be able to find a minority of areas where there’s a shortage in skilled workers but I suspect that the bigger picture has the opposite trend.

  • david thorpe 15th Aug '11 - 10:30am

    @ tom

    Im afraid I used clumsy languagwe., a better way of saying it might be, there is a fixed amount of demand for labour….in an economy

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