The weekend debate: Should we support dropping the 50p tax rate?

Here’s your starter for ten in our weekend slot where we throw up an idea or thought for debate…

With leaks pouring out of the Treasury pointing towards the dropping of the 50p tax rate for high-earners above £150k in this week’s budget it seems a good time to have a robust debate about its merits.

The 50p rate was one of the party’s most high profile policies under Charles Kennedy, but was dropped in 2006 with greater emphasis instead placed on taxing wealth not income, as well as pollution taxes. However, in government, we have broadly supported the 50p rate’s retention with the argument that, at a time of austerity, government needs the income to reduce the deficit, and tax-cuts should first focus on the lower-paid.

If the press reports are to be believed, it now seems unlikely that the Lib Dems in Coalition will complete the raising of the income tax threshold to £10k before the 50p rate is axed — so should we be looking to block George Osborne from cutting the rate and, if not, what concessions should we be looking for in return?

Over to you…

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38 Comments

  • Andrew Gill 17th Mar '12 - 4:57pm

    It is not unfair for the wealthiest to contribute their share to the tax pot. If the 50p rate is too easily avoided by those fortunate enough to pay it then more must be done to tackle this.

    If the 50p rate were to go then the question is what would replace it. If this is to be a tax on wealth rather than income, so be it.

  • It is very likley that 52% (+13% employers NI) is on the wrong side of the laffer curve.

    On that basis the rate should be set to the optimum point on the curve.

    If the the tax is loosing revenue then scrapping it will be an additional saving and should be used to acellerate the rise to 10K allowance.

    If the allowance is brought forward sooner then this is an improved incentive for work.

    The two cuts should be highlighted as part of a pro growth drive , both parties need to stop sounding like they are beeting up business and start highlighing the benefits of a business friendly culture has. With particular regard to retoric.

    !usiness confidence will never built by the current negative retoric.

  • Quantifying the effects of the Laffer curve is an exercise that generates much dissent among the economic community. No such doubts exist in the mind of Nigel Lawson, who never fails to take the opportunity to tell us that tax receipts increased when the top rate of tax was first reduced from 83% to 60% and then subsequently to 40% in the eighties. Nigel does not mention though, that it was eight years and in a booming economy, before the Thatcher government felt sufficiently confident to lower the top rate to 40%.

    Lloyd George in 1909 introduced higher rate taxes on those earning above the equivalent of around 150k in today’s money and a super-tax on the very wealthy, albeit at much lower rates than those we have today. The super-tax became a surtax and that system remained in place until it was replaced with the higher-rate band system in 1973 . The people’s budget of 1909 had proposed a Land Tax, but the Conservative-Unionist opposition in the Lords, dominated by large landowners, effectively blocked the proposals.

    In presenting his budget LG commented “I cannot help hoping and believing that before this generation has passed away, we shall have advanced a great step towards that good time, when poverty, and the wretchedness and human degradation which always follows in its camp, will be as remote to the people of this country as the wolves which once infested its forests”

    So what would Lloyd George think of our situation today? Would he still be proposing a Land tax based on the ideas of Henry George? I think he would advise replacing the 50p rate with a property tax. Would he consider that poverty was now as remote to the people of this country as the wolves which once infested its forests? I suspect not.

  • Richard Dean 17th Mar '12 - 7:05pm

    I suppose a LIBERAL princple might be to tax as little as possible, freeing people to make their own choices on what to spend money on, and a DEMOCRATIC principle might be to tax in a way that tends to reduce the spread of people’s after-tax incomes.

    On this basis, if a cut will increase the total tax obtained, then yes, that would be justified, since it would then allow either tax t o be reduced elsewhere or services/support to be increased (nore democratic?). Sounds illogical to me, and suggests the Laffer idea is nonsense.

    Otherwise, no, since it would increase the gap (anti-democratic). Also, the effect on people could reduce productivity a small amount but in a large workforce, doing more total damage than any stimulus it might generate, and resulting in more tax being needed from less well-off A(anti-democratic again), reducing their freedom to choose (anti-liberal)

  • I think I’d actually support a move to 45p (+2p NICs) if that were to be more permanent.

    But to completely scrap the additional rate, we’d need some big concessions, including property and pension tax reform, as well as a U-turn on working tax credits, and more sensible reform of child benefits than is planned.

  • Keith Browning 17th Mar '12 - 8:03pm

    One report I read said that George Bush giving tax breaks to the rich in 2002, sparked the economic crisis, and that of his tax 99% of the benefit went to the 1%.

    I think he also said that if the 99% wanted to live like the 1% then they could borrow the money.
    They did..!!
    Hence 2007 onwards. Give them nothing..!

  • @ Keith Browning

    I note that you rocognise. (Which many sadly don’t) that the crisis was a debt crisis. Too much borrowing, you highlight the private sector aspect of that borrowing.

    Given that position do you not recognise that the artificially low interest rates would be the largest factor for excessive private borrowing and insufficient private saving. Given the debt component of the crisis and the fact that some of the very badly hit countries include Ireland, Spain, Iceland and the UK how would you explain a US tax cut for that?

    I would consider a LVT to be preferable in the long run but we can’t implement that in the very. Short term so we have to make do with adjustments to the existing system for the next budget.

  • We need much more data.
    1. Breakdown of tax paid according to earnings.
    2. How much avoidance of stamp duty due to people using foreign registered companies when buying properties. People who use offshore companies to avoid stamp duty are unlikley to be retired people who bought their home decades ago and seen massive capital appreciation yet have relatively low income.
    3. How many and how much tax avoided by salary being treated as company dividends. People paid by one employer yet manage to avoid PAYE by having earnings treated as dividends by forming a limited company is a potentially large form of tax avoidance

  • Keith Browning 17th Mar '12 - 9:22pm

    This argument is surely not to do with total tax take but whether the rich are feeling any pain – like the vast majority of the rest of us. If it isn’t hurting them yet it isn’t working. And please don’t someone say these are the clever, entrepreneurial people. My experience is that most tend t be self centred and greedy. That is how they got there. Not a good role model in my book. If they want to go abroad then let them go. It will at least mean less people having to stand on the fast trains from Haslemere to Waterloo.

  • Leaving aside the economics, a cut in higher-rate tax, when so many people on lower incomes are suffering, is an absolute open goal for Labour. They will say (with some justice) that this is a case of the Tories dishing out goodies for the rich and the LibDems aiding the process. If Clegg is fobbed off with vague promises of some sort of future “tycoon tax”, he is even more dim than I thought.

    As for the Laffer Curve, good luck to any candidate trying to explain that one on the doorstep at the local elections – “actually, by cutting tax for the rich, they end up paying more tax overall. What do you mean, have I been drinking?”

  • Howard and Lorraine 17th Mar '12 - 10:18pm

    It’s as simple as this.
    If the 50% rate is lowered (never mind ‘ wealth tax’ substitute and ‘closing tax loopholes’) then there at least two fewer member as of the Liberal Democrats as from April..

    Is that clear enough?

  • This whole debate is beside the point, since everything but the dots and commas has now been signed off and sent off to the OBR. But anyway…

    As a long term position, something like 20% and 40% seems about right to me (but we should get away from the idea that these rates can never be adjusted – that doesn’t apply to any other tax and hobbles a chancellor because of the relative size of the income tax take). But the other side of the deal should be to ensure that those amounts are what is paid, and a “tycoon tax” set at something like 20% would just make major tax avoidance acceptable, not just legal because it isn’t specifically forbidden.

    In the short term, to remove the 50% rate would be politically ludicrous even if it did pay for itself in the long run UNLESS something fairly big was gained in return.

    The mansion tax has always bothered me (is it actually official party policy or just one of Vince Cable’s back-of-the-envelope jobs?), because I’m sure there will be some really unfortunate grannies in big houses that the Daily Mail can find. I’m tempted by capital gains tax on the profits of house sales (probably at a low rate to begin with), which might also have a brake effect on house prices.

  • If members like Howard and Lorraine are likely to leave, together with the many others who have huge doubts about the NHS bill, and those who are discovering more and more the reality of “welfare reform” (“oh, it’s just releasing people from the imprisonment of worklessness”), the party has a grim future. We have already lost many from the centre left mainstream of our party. These measures will leave a centre right rump, most of whom I am sure the Tories will welcome in the manner of the National Liberal Conservatives in the 50s. Frankly, if we don’t have a Grimond figure available soon, an even worse fate awaits than the Liberal Party in the mid 1950s. We need a revival of radical politics, and soon. We need a recommitment by the party to a progressive income tax. We need international agreement on a Tobin Tax, plus action to close down offshore tax havens. We need to recognise that without closing these loopholes, and a much more equal society, the multiple threats to our environment and natural resources and biodiversity will intensify, with conflicts steadily becoming more general. People on this site perpetually complain about the threat from the Labour Party. Frankly, the main threat there lies in inertia, and too much acceptance of what is currently going on.

    I would hope that the efforts of Liberal Left, and the ongoing work of the SLF, could make some impact here.

  • coldcomfort 18th Mar '12 - 9:27am

    Being breathtakingly naive is what distinguishes the LibDems from Labour & Tory. It should be no surprise that Osborne will do everything he can to push LibDems to snapping point. It is part of a blindingly obvious strategy to ensure a Tory overall majority at the next General Election & destroy the LibDems, an ambition in which both Tory & Labour find themselves in full agreement. The 50p tax rate is important solely for its symbolism. What it actually raises in cash is irrelevant. Our tax system needs a root & branch overhaul, not just because it is unfair – people are getting as sick of ‘fair’ as they are of ‘iconic’ both words now so overused as to become meaningless., but because it is an irrational hotch potch of measures that serves mostly to keep tax specialists in a job. The Leadership should make it clear that a) there is no short term alternative to the Coalition except a snap General Election that would not be good for the country whatever its outcome b) Consequently that LibDems in Government will abide by the doctrine of collective responsibility however much that sticks in the gullet c) LibDems MPs NOT in Government are free to vote against measures that they find objectionable.

  • Make that 3 Howard and lorraine. The reasons to leave are just mounting up

  • To howard, lorraine, sue – blackmail is not a good way to persuade others. The obvious response is likely to be- well go then. I would ask you to stay but I would also ask you to withdraw your threats.

    As to party membership, the trend for the last 60 years has been for all parties to lose members, about 90% loss for the tories, 80% for labour, 35% for us (since 1997) & 75% for the greens.
    Its a common pattern of long periods of decline interspersed with short bursts of recruitment, the point is whether we are losing more members, in proportion, than our rivals ?

  • MacK (Not a Lib Dem) 18th Mar '12 - 11:05am

    Some of the those posting on this thread seem to be turning cartwheels in order to construct a rational economic argument to justify the removal of the 50p tax. But your audience is not an elite group of erudite students possessed of esoteric understanding in the lecture hall: it is the British people and for them the 50p tax is a political shibboleth: tangible evidence that the rich are bearing some of the pain. That the Liberal Democrat Leadership could even accept its removal without gaining anything substantial in return, such as a Mansion Tax, shows how incompetent and unfit for coalition government they are. The removal of the 50p tax will show even more than the tuition fees deblacle; even more than the betrayal on the NHS; even more than the cuts to people’s jobs and wages; and even more than the massive unemployment you have created, that the Liberal Democrats are no more than the stooges of the Tories. If you have the slightest political nous you will vote down this budget if it contains the removal of the 50p tax and join the opposition. It will trigger a general election but that’s what the Tory backbenchers obviously want anyway. However, it would deny Cameron his boundary changes which, of course, was why he wanted you in the coalition in the first place.

  • I agree fully with Tim13 – we DO need “another Jo Grimond figure”. It was he who influenced my and helped to shape my political views in the 1960s. The Party has strayed so far from his original liberal and radical views that it is now totally unrecognisable as th same Party!

    I admire the work which SLF and the Liberal left are doing to try to bring back our Party to the right path! They will have their work cut out to do this in time for the next General Election, but I am sure that they will try very hard to do so.

    I am very angry when I read about all the tax avoidance which is still rife among the wealthy and then I see a young family with three children living on £55 per week [paid fortnightly] plus £50 Child Benefit which they will lose next year and where the husband is sent by Job Centre Plus to “non-jobs” which are “commission only”, having to pay his own travelling expenses to go “door knocking” touting for business for a martial arts class sign-up anywhere in the country where they decide to send him! American companies flogging pyramid selling and multi-level marketing [the man at the top gets £70,000 per annum] should NOT be allowed to advertise in Job Centre Plus! If young folk refuse to go to interviews for these non-jobs they are penalised!

    Where are these 1000s of jobs which the Government has created? They are not in the Job Centres!

    THAT is what is happening in the real world people!

  • I do not agree with abolishing the 50p tax rate at all.

    And I do not agree with members of the “elite” Bankers, Musicians, Footballers, etc etc being able to set up bogus companies that their income is then paid in to, So they pay themselves a lower wage in order to avoid the (50%) tax rate.
    They then use their bogus company expenses to pay for Travel, Accommodation, Food, Clothing, Cars, and even Surgery all tax deductible of course.
    And then their company only has to pay something like 23% Tax on it’s profits.

    This is a disgraceful way in which the rich and the elite can get away with paying their dues and living a life of luxury.

    The system needs changing. The top rate of tax needs to remain.

    And you should not be allowed to register as a business “unless” you actually produce something or sell something other than yourself

  • What is the point of the question? It’s done and you are supporting it. First the comments from the likes of Alexander were about how it would not be dropped, then this shifted to not without a mansion tax, but now it looks like it will happen with nothing tangible in return. Do the Tories just do whatever they want now?

  • Malcolm Todd 18th Mar '12 - 12:57pm

    I’ll hold off condemning until we actually know what’s in the budget. But I find it curious that Clegg has suddenly started banging on about this “tycoon tax” that we never heard of before. Are we to be presented with this as a “lib Dem win” in return for scrapping the 50p rate? Bringing in a technical tweak to the tax system that has never (do correct me if I’m wrong) been part of our party’s policy or even noticeably discussed in the party until it sprang full-formed from our leader’s head? I’ve been hanging on by my fingernails for almost as long as I’ve been a member. I can hear a splitting sound at the end of my arms.

  • Paul Murray 18th Mar '12 - 2:01pm

    Party Conference voted against a 50% tax rate a few years ago so it’s hard to argue that the party is “ideologically wedded” to the notion.

    Mention of the Laffer Curve is interesting. When the voodoo symbols of trickle-down economics can be invoked in a Liberal discussion forum without invoking fury then something has changed.

    The Lib Dems were once the proud standard bearers of Keynesianism, but now appear to be uncritical supporters of the fiscal compact. For evidence of the compact’s chilling effects on counter-cyclical fiscal policies look no further than what is happening in Spain.

    Can we take it that the party’s acquiescence to the clearly signalled Budget plans – tax cuts for the rich – show that the party is morphing into a European Liberal Party – Fiscal Conservatives and Social Liberals?

  • Mike Barnes 18th Mar '12 - 2:15pm

    “It would be politically inconceivable for government to take some of the tax pressure off high earners at a time when people on low pay are suffering public sector pay restraint and cuts in real incomes because of high commodity prices.” – Vince Cable 2011

    “Anyone who thinks that we’re going to shift our priority to reducing the tax burden for the wealthiest has got another think coming. The idea that we are going to shift our focus to the wealthiest in the country at a time when everyone is under pressure is just in cloud cuckoo land.” – Danny Alexander 2011

    Cloud Cuckoo land indeed, couldn’t have put it better myself, but here we are I guess.

  • I can’t make this add up.

    All we are hearing in tax cuts or threshold increases

    Top rate cut to 40-45% (cost around a billion)
    Threshold increase to £9000-10000 (cost around 5-10 billion)

    Assuming this is going to be cost neutral – where will the money come from? No mansion tax apparently, some concessions on tax avoidance (tycoon tax) but this is a bit woolly to say the least.

    If there is no commensurate reduction in spending, tax increases elsewhere then what does this do for the deficit?

    I am happy to see a pro- growth policy but I do think it needs to be a bit better strategically though out. Are public sector workers in the regions going to pay for tax cuts for those earning over £150K?

  • 1.How much is being list in stamp duty by registering properties to companies offshore?
    2. How much is being lost by an individual working for a single organisation but is paid via a company?

  • – conference did vote against the 50p tax rate, but that was then. Why not introduce a 45p rate for income between £150k and, say, £200k.. BUT not before the threshold rate has been increased to £10k and a date set for increasing the threshold to a standard weekly income on the minimum wage.

  • David Walker 18th Mar '12 - 4:53pm

    There is convincing evidence that the top rate of income tax should return to where it was in the 1970s.

    I recommend listening to Left Behind from CBCradio:
    http://www.cbc.ca/ideas/episodes/2012/01/16/left-behind/

    It’s from a Canadian perspective, but it makes very interesting listening.

    Description:
    Left Behind
    Over the past 30 years, the benefits of economic growth in Canada, the US and much of the rest of the world, have gone increasingly to the top one percent of the population. For the majority of families, however, incomes have stagnated. This rise in inequality coincided with a sea change in government policy. Beginning in the 1980s, governments in much of the English-speaking world embarked on what has been called the neoliberal revolution – deregulation, privatization and tax cuts, aimed at liberating markets and stimulating the economy. The rising tide was supposed to lift all boats, but it didn’t. Jill Eisen explores what happened.

  • Philip Rolle 18th Mar '12 - 5:02pm

    To those who say that more should be done to stop avoidance of the 50p rate…

    How do you stop people moving abroad? How do you prevent people working part time?

    An increasing number of people are doing this; consultants, GPs, dentists. Part of it is because they get such a good deal anyway, but the 50% rate comes into the mix too.

  • Malcolm Todd 19th Mar '12 - 12:06am

    @Philip Rolle:
    I’ve tried and tried, but I can’t believe in this thought process:
    “It’s just not working full-time for £200,000 a year when all I get is £114,000, so I’m going to drop to four days a week and have £94,000 to spend instead.
    “Of course, if it wasn’t for that 50% rate, then full-time I’d get £119,000 net so that’d be worth it.”
    Seriously, that’s what you’re suggesting. I just don’t believe it.

    Incidentally, I know GPs and dentists are very well paid, but how many of them actually earn over £150k?

  • Matthew Huntbach 19th Mar '12 - 12:32pm

    With the leaks coming out about what’s going to be in the budget it’s hard to avoid wondering whether the Tories are deliberately trying to provoke the end of the coalition. It seems to me that this is a very deliberate snub to the Liberal Democrats, a deliberate rejection of what I saw in Gateshead almost all party members saying they wanted to be the priorities – those whom I had tended to write off as “far too pro-coalition” as well as those closer to my own position of just tolerating it.

  • We are ignoring top reserach scientists and engineers. If one is a chartered engineer from top universities such as Cambridge/Imperial , then it is becoming very tempting to over overseas. Look at someof the salaries offered in Australia. Tony Benn had to travel around the USA asking top scientists if they would return to the UK. When a Departmental Head in the USA earns more than his previous departmental budget in the Uk, then we have the conditions for a brain drain. The designer for the Ipod and Berners Lee are all working for American organisations.

    People are forgetting that technology and science knows no barriers . The major problem is that the UK has not produced a highly skilled population ; 20-25% lack adequate literacy and numeracy. Well paid jobs increasingly depend upon skill and responsibility. Read the Dyson Report” Ingenious Britain” . Dyson says71% of the vacancies in engineering are for technicians and process operative roles.Even in a a period of low growth the UK, is short of skilled staff. A major reason for the pay gap is that the bottom 30% of earners probaby lack the education to become craftsmen which would enable them to achieve above average income.

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