Opinion: Now is NOT the time to abolish 50p tax rate

A letter appeared in the FT today from a deficit* of economists which suggested that the 50p tax rate be dropped. Their reasoning, as was stated on yesterday morning’s Radio4 Today programme is that hedge funds are relocating to Switzerland in favour of the cheaper tax. While I assume if the tax was dropped the 0.5% of the population in the UK who actually pay that level wouldn’t contemplate leaving?

Having worked with hedge funds I recognised a few of the names, such as Sushil Wadhwani, listed in the BBC article as former Monetary Policy Committee (MPC) member. In other spheres he is better known as founder and CEO of Wadhwani Asset Management, the algorithmic hedge fund recently acquired by one of the worlds largest hedge funds (Caxton) for what is rumoured to be tens if not hundreds of millions. So he is certainly someone who knows what a hedge fund manager is likely to do. As is Roger Bootle founder of Capital Exonomics Ltd, a firm that advises hedge funds.

However, a better question might actually be how many hedge fund managers actually pay the 50p tax rates on their global earnings? Also if the 50p tax rate was dropped would the people who considered moving to Switzerland where they would pay 11.5% really mind paying 40%? And for those people who are paying the 50% tax on their UK earnings how much of that extra 10% would they actually spent?

I would say a much better use of resources at the current time is to move those with the least completely out of tax. The sooner we can move to the 10k tax free amount the better it will be for the economy as these are the people who will actually spend the entire difference. These are the people who will change the overall system. Not those on the highest amount who will save their 10% on everything over £150,000 no doubt in a nice offshore account where further interest is not taxable.

At the same time as these “economists” are looking to preserve their self interest a study was released by Save the Children and the Daycare Trust which found the poorest families are getting into debt and eating less as they find themselves paying nearly a third of their incomes on childcare. The majority of people (58%) said “they were, or would be, no better off working once children were paid for.” (Guardian)

There is a huge disconnect between those at the top and those at the bottom of the income gap. This inequality ballooned under the Labour government with such policies as dropping the 10% tax rate. But now the current government has a chance to reverse the policies of the last, to look after those at the lower end of the income spectrum and decrease the inequality in our society. The 10k tax free allowance can help those at the lower end, increasing their take home income and hopefully giving them an equal footing where work pays more than not working. If not there needs to be additional help to cover childcare costs. The last thing the economy needs is for people to be out of work because they couldn’t afford childcare not for a few hedge fund managers and self interested consultants to be threatening to leave the country if they don’t get their way.

*the collective noun for economists

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34 Comments

  • Malcolm Todd 8th Sep '11 - 2:22pm

    Daniel – tax isn’t a punishment. It’s the price of membership in a modern, developed society. Differential tax rates reflect partly the greater ability of those on higher incomes to pay a larger share of their income without hardship and partly the view that the market distorts the true worth (whatever that is) of the economic contribution of the richest.

    As for not generating much revenue – no doubt it wouldn’t cost very much if we just didn’t take any tax from, say, the 1000 highest earners in the country, but that wouldn’t make it right.

  • I’m old enough to remember the 98% (83%) Tax on high earners…..Those liable merely awarded themselves massive pay hikes using the excuse, “Almost all goes to the country”…
    When the tax was dropped to 60%, and then 40%, the wealthy still awarded themselves the pay hikes; not bothering to even justify it…
    The figures released this morning show how the gap between ‘rich and poor’ is still accellerating. The wealthy are still doing very well thankyou….
    Whines over the “Brain Drain”, etc. are always trotted out….As was said, “If Switzerland offers a 5th of UK tax, why would anyone be less likely to go if it was a 4th (or even one half)”s

    When action was taken over banks we were assured, “They’ll all go abroad”…How many did?

  • Adam Corlett 8th Sep '11 - 3:57pm

    It should be noted that the letter “is part of a campaign being promoted through PR firm Westbourne, which they say is funded by businesses concerned about the impact of the 50p rate”.

    Let’s continue to stick up for those who can’t afford to hire PR firms to campaign against the taxes that most affect them!

  • Great article, and great comments. Some really good ideas being expressed by all on this thread. Hope the leadership are taking note.

  • Every time I watch the news I hear people moaning that they cannot afford thier big motgage in London on only 50,000, 100,000 per year move out of London, Mp’s moaning that tthey can’t mange on 65,000+ per year.
    Back in the real world It’s About time we supported those who work 60-80 hours per week to support their families, the £10, 000 tax threshold should be implemented immedietley 13 years under Labour led to greater inequality, I can’t really see the coalition policies narrowing the gap.

  • Julian heather 8th Sep '11 - 4:42pm

    Indeed some excellent comments here that should be read by the leadership. A couple of other points:

    1) Did I read somewhere that some financial services/banking folk who had already moved to Switzerland were already moving back to the UK aftyer being disillusioned at living there ? Is there any evidence to support what was probbably anecdotal evidence ?

    2) There have been some suggestions about keeping the 50p top rate, but instead raising the threshold at which the 50p rate is levied. Would there be any merit in this ? A sensible compromise, or the worst of all worlds ?

    3) As mark Pack has commented, elesewhere, it’s good that Danny Alexander has been talking about the merits of raising the lower rate tax threshold to minimum wage level. Sounds like an excellent idea. If we need a boost to economy to try and get growth moving, it’s here that tax cuts would be most effective, rather than at the top end..

  • Rachel Coleman Finch 8th Sep '11 - 5:08pm

    Giving up work to take care of the children because “we’ll be no better off” makes short-term sense, but is likely to reduce lifetime earnings significantly, first because there’s no guarantee of getting a job again once the children are older, and second because even if you do, the career gap usually costs in salary and lost skills.

    Childcare vouchers help, but they sometimes interact badly with child tax credits, and much of the benefit goes to higher-rate taxpayers. (Though the rules were changed on 5th April 2011 for new entrants, higher-rate payers already in the system, like me, continue to get the old allowances.)

    A 10k tax free allowance and some effort on simplifying/replacing the administrative nightmare of tax credits would return more money to the lower-paid and make it less likely for parents to drop out of employment.

  • I’d be happy for the 50p rate to be scrapped if the people paying it were prepared to submit to the following conditions:
    Maximum pay of £150k a year in the public sector for any job
    Executive pay to be set by the ultimate shareholders not by nominees (e.g. someone on £20k with a small personal pension, who actually owns the shares, gets to set the pay not the asset management company who runs the pension fund)
    The creation of a proper free market in financial services with no tax payer guarantees. Anyone can invest your money on your behalf but if they lose it then you only have yourself to blame.

    I suspect they’d soon change their tune if they knew they’d be faced with actual competition in their monopolistic jobs.

  • Richard Davis Posted 8th September 2011 at 4:17 pm | Permalink
    @Jason I know the Beatles song, but in that it was “1 for you 19 for me” was it really up to 98%?…………….

    Yes! 83% but with a 15% surcharge on ‘un-earned’ income (investments and dividends)…It was introduced in 1974 and lasted about 5 years…

  • Daniel Furr,

    Giving someone something less than they feel entitled to can in no way be described as ‘punishment’. In which line of employment is it possible to earn £150,000 per year through nothing but hard work?

  • Simon McGrath 8th Sep '11 - 8:18pm

    Yes it was 98% in 1974 and like know the main motive was jealousy and spite rather than maximizing income.

  • Simon McGrath 8th Sep '11 - 8:18pm

    Which is not to say I think it should be I’m mediately reduced. Short term priority should be tax cuts for this lilkely to go out and spend the money.

  • @Malcolm Todd

    “It’s the price of membership in a modern, developed society. ”

    Hogwash, we’ve some of the highest rates of taxation in the developed world and our economy and society shows every sign of going backwards rather than forwards. The nations that are doing best economically have flat taxes.

    Flat taxes when combined with meaningful tax allowances are effectively progressive, people on average incomes loose, as a percentage of their income, half of that than the rich and super rich, while the poorest loose none.

    Keeping a measure that makes our tax regime less flat is ridiculous. It’s the politics of envy and gesture rather than freedom and substance and is therefore diametrically opposed to what is truly liberal.

  • Oranjepan………………………………One way round the twin problem of increasing fairness and raising revenue might be to say income over £1m rather than £100k should be taxed at 50%, while another might be to introduce intermediate bands such as a 25p band, a 35p band and a 45p band………….

    A sure way to get even less from the 50% band (as your paragraph on tax avoidance shows). A better way to stimulate growth is to stimulate spending. It is a fact that lower earners spend far more as a percentage of their earnings than high earners; reduce their taxes and/or drop the rate of VAT.

    ……However it is also true that any discussion about income tax which doesn’t mention the massive levels of tax avoidance through various legal loopholes is doing the public a disservice………

    I agree, unequivocally..

    ……..There is something particularly immoral about company directors who decide their own income level at the same time as their own income tax rate – it’s certainly ugly, and possibly sick too…..

    I agree; but why bring morals into this argument when you write against using a moral yardstick on the 50% band?

  • jedibeeftrix……………………………..I am delighted that the Lib-Dem’s are about to achieve their goal of the tax-free £10k personal income allowance, and i am quite content that the 40p rate exists for those who earn over £35k………

    So, it’s OK to expect those on >£35K to pay tax at a higher rate than those on less than £35K. but only fools with a “whacking great chip on their shoulder” should use the same logic for those on >£150K??????

    …………..The 50p fails this test, because it fails Adam Smiths final dictum that a good tax must be an efficient one, so there is only one logical conclusion……… Even one, G. Osborne, has the sense to wait for the result of the Revenue & Customs study before deciding whether it’s efficient or not.

  • I still don’t understand how you can baulk at an extra 10%, applied only after the £115k between £35-£150K, and yet be comfortable with the DOUBLING of the rate applied after the £32K from £2.6K to £35K. If anything is ‘punative’ it’s the doubling of the tax rate for far more of the population..

  • Jedibeeftrix & Charles,

    You both use the language of envy and punishment in reference to taxation. Could you please explain how it is possible to define taking an extra 10pence of an individual’s 150,001st pound of earnings as amounting to punishment?

    The logical underpinning of your theses is that earnings are entirely deserved and as such they are wholly and absolutely the property of the individual that earns them and that individual liberty is identical with the property and wealth one owns. None of these premises are true. No society organises itself on the premise of absolute property rights if it engages in taxation. Under such an understanding of the rights of ownership then all government action involving property must be considered personal punishment. Therefore all taxation is individual punishment, as are all compulsory purchase orders, all planning restrictions etc.

    Charles could you specifically explain how it is possible to replace progressive taxation with flat tax and then have tax allowances in order to be progressive and still have a flat tax. We might as well just say that we are all on a flat tax of 50% but those who are paying less are receiving “allowances”. The point of flat tax is that there are no allowances, hence, “flat”.

    Jedibeeftrix, could you please explain what your understanding of liberalism is? If an idea can be considered illiberal because it is inefficient then I have been reading the wrong books. (Note to all liberal Arsenal fans: Campaign against Arsene Wenger and get George Graham back in, or better still that arch liberal Sam Allardyce).
    If it is that 50p rather than 40p taxation on the amount above £150,000 is an issue of liberty then it must be that freedom is directly proportional to wealth; so then do you think, that those who have less than £150,000.60 must necessarily be being deprived of their freedom? Should the liberal cause be “We want £150,000.60 per annum.” “When do we want it?” “Now! (or by the end of the financial year)”?

    If a tax raises ‘very little’ then it could be described as doing ‘very little’ good but not ‘no’ good. If a tax is not achieving the ‘positive’ good of bringing in funds for the exchequer it cannot be producing the ‘negative’ (I’ll use your terms but must confess to not really knowing what they mean, if you are alluding to the notion of positive and negative liberty then you’ve got them the wrong way around) good of redistribution because the only purpose of the exchequer is redistribution. All taxation that is subsequently spent on social goods is redistributive so by your definition all taxation is socialist.

    Many of the posts I have read here that wish to declare the incompetence of the last labour government do so by referring to the fact that the gap between rich and poor widened. The fact that at the same time the UK was the most successful country in the world at eradicating absolute poverty and child poverty suggests that the labour party vacated the arena of taxation of the rich as a tool for creating an equal society. In other words the last labour government engaged in exactly the policies you appear to be promoting. The Liberal Democrats on the other hand complained that reducing absolute poverty is pointless if you allow the wealthiest to run riot in the accumulation of wealth at the top. You may have been backing the wrong horse.

    All tax regimes are tools of social engineering including the absence of taxation. Refusing to rebalance the iniquity of income distribution created by capitalist free markets is equivalent to declaring that society values the virtue of being wealthy above all others. One campaigning tool those who wish to engineer such a society use is to promote the belief that free markets reward effort and hard work rather than inherited good fortune and pre-existing wealth. This seems to be fundamental in embedding the persecution complex that the wealthy, aspirational and their toadies have and exhibit every time they complain that being taxed from being very, very, very wealthy down to being only very, very, ver wealthy constitutes a punishment. It isn’t and it’s about time those with the most contributed their fair share.

  • @JRC

    To say it’s just another 10p in the pound misses the point that it takes the rate from 40% to 50%. If it was 10p more from 20% to 30% then my support for a flat tax would be diminished, or rather it would slide down my priorities.

    I support a flat 30% tax rate on all income above £12,500 and the abolition of National Insurance. The reason a tax allowance is necessary is because its impractical to collect income taxes on people who earn very little. Most are entitled to state support, they may want to do odd jobs for cash in hand, and of course the treasury doesn’t earn much income from them anyway.

    The reason this allowance is different to what you describe is that this means a minority of people pay a great deal less income tax than the majority and for practical reasons. You describe an allowance that ensures a minority pays a great deal more income tax than the majority, but for what reasons? Because it’s the price of living in a civilised society? Or because it’s a supposedly painless way of raising more revenue?

    Economic growth requires capital. The best way for that capital to make its way to enterprises is through individuals rather than government ministries. What’s the effect of a middle class keeping more of their income? It’s not a waste, it doesn’t amount to a cut in the economy as Ed Balls once suggested. A middle class with more income provides the capital necessary for the economic growth that provides opportunities for the poor to become middle class themselves.

    Benefits are an important safety net to prevent long term damage to individuals, families, communities and society from short term misfortune, but that’s all they should ever be. If you start thinking of them as an some great leveller than you’re packing up and kicking our liberty in favour of socialism. If you want to believe in some kind of greater force that makes everything right in the end then choose religion, you’re less liable to be disappointed.

  • Sue Sutherland 10th Sep '11 - 7:43pm

    The last time I looked one of the core beliefs for Liberal Democrats is equality of opportunity therefore we should be looking at a taxation system which attempts to deliver that. We can only afford benefits and other forms of support for those who need them by taxing those who have more than enough money for their needs.

    I could say – if the 50p tax rate doesn’t raise enough money then let’s try 60p – but I realise that would be too simplistic – but perhaps worthwhile havinga look at? Instead why don’t we tax inheritance – this would overcome the arguments that too high a level of Income Tax destroys motivation and encourages people to emigrate. Instead they would be taxed after such issues cease to matter – you can’t take it with you. This would be a much clearer way of helping to provide equality of opportunity and would also motivate high earners to spend more of their money. Yes we need investment and that could be encouraged by tax breaks for those who invest in our economy but we also need people to spend to keep the economy growing.

    During most of the last Labour Government this expenditure was encouraged by easy borrowing and growth was funded by private debt rather than public expenditure and public debt which previous Labour and one Nation Tory Governments maintained (although Wilson was the one who introduced Hire Purchase – before that people mostly had to save up for what they wanted). Perhaps it’s time to look at freeing up the money the rich are using to buy gold to give the economy a boost and provide the revenues the Government needs to help the less fortunate.

  • Oranjepan………………………………. I don’t think we should be placing any emphasis on stimulating growth by stimulating spending whilst high levels of personal debt remain. That’s a sure-fire recipe for another crash down the road. Far better to stimulate investment………………….
    Investment in what? No matter what, unless someone buys the goods/services their can be no economy to grow.

    Charles……………………………What’s the effect of a middle class keeping more of their income?…………….

    Middle class homes with single person income in excess of £150K, not many????

    ………………………….. A middle?? class with more income provides the capital necessary for the economic growth that provides opportunities for the poor to become middle class themselves…………………………

    Strange, then, that the gap between rich and poor continues to increase whilst those with ‘spare’ capital are continuing to invest in ‘safe’ havens.

    Sue Sutherland……………………although Wilson was the one who introduced Hire Purchase – before that people mostly had to save up for what they wanted…………………..

    I have a ‘Giles cartoon (July 15th 1954) ‘explaining’ HP and there was a HP act of parliament in 1938….So long before Wilson’s era.

  • There is never a time to abolish the 50p rate. It should be much higher. I have never bought the argument that high taxes drive people away. Rich people don’t like paying taxes. Does that come as a surprise? That’s no reason to roll over and let them get away with it. ‘Tax is the entry fee to a civilised society’ (JK Galbraith I think). The well off have a duty to help the worse off.

    If the 50p rate is not bringing in what it should, then some clever accountants are finding ways to circumvent it. The answer is not to scrap it, but to enforce it.

    When I was a Young Liberal, the basic rate of income tax was 7 shillings in the pound (35p for you youngsters) and top rate tax reached 83% in 1974 with a 15% surcharge on unearned income making a potential marginal rate of 98% (i.e. on bankers bonuses!). That’s penal taxation! That’s how we could afford free university education, the NHS etc. Nostalgia won’t ever bring that back, because we have had over 30 years of Tory and Labour Governments saying that income tax is evil and must be cut.

    Hold firm is what I say to Nick Clegg and co. The public don’t buy the nonsense that’s being put around by apologists for the very wealthy. Well done Stuart Rose.

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