The Labour party’s war on the better off is dreadful economics

 
Allister Heath

WHEN governments don’t like something, they tax it. Hence why we have “sin” taxes on alcohol, tobacco and various forms of pollution. Ed Balls’ announcement at the weekend that a Labour government would increase the top rate of tax to 50p – coming on top of his plan to hike corporation tax by 1p on big firms, to slap a wealth tax on expensive homes, and for yet more taxes on bankers’ pay – tells us all we need to know about Labour’s attitudes to success, wealth-creation, hard-work, ambition and aspiration. The party doesn’t like it and wants less of it; it wants to “punish” people for the temerity of doing well.

This is a terribly sad state of affairs. The New Labour interlude is well and truly over, which is a tragedy for British politics and the future of this country; and for the first time since Neil Kinnock led the party, Labour seems to have no interest in being a pro-business party. Balls’ denial of this doesn’t wash: you can’t be supportive of business and commerce if you want to impose punitive taxes on its fruits and its most successful practitioners.

Bashing the rich is popular and the City is still hated; the polls have long shown that most people want to hike taxes on those who earn significantly more than them. But that doesn’t make the policy right. The unintended consequences of Labour’s war on wealth and high incomes will be to hurt everybody else by making the UK a less desirable location for businesses and investors, and thus by reducing economic growth. Countries don’t get rich, or solve any of their problems, by singling out their top achievers, largest employers and biggest investors for ritual beatings.

Quite the contrary, in fact: the 50p tax rate will, in my view, reduce the total amount of money raised over time by HMRC. Taxable income will be lower than it would otherwise have been; the taxman will get a larger slice of a smaller pie. It will inflict pain without gain; in fact, it will raise less money for the exchequer, meaning that the tax burden on others will have to rise.

The top one per cent will earn 13.7 per cent of all income this year but pay a record 29.8 per cent of all income tax. This year’s share was slightly exaggerated by delayed income being shifted out from previous years to avoid the original 50p rate. But the top one per cent’s contribution has been rising since the 1980s and it is clearly absurd to claim that “the rich don’t pay their fair share.” In fact, their contribution is immense. If the aim is to get them to pay even more, the best way is to allow them to prosper and that share will keep on going up.

Direct tax rates are already counter-productively high. The current top rate of income tax is 45p; on top of that there is 2p in employees’ national insurance and 13.8 per cent in “employers” national insurance (economists usually agree that it is a tax on labour, not profits, and is borne by workers in the form of lower wages, not companies). That means that the total tax on labour earnings is 53.4 per cent already above £150,000. Labour’s hike would take this back to 57.8 per cent. Those “moderate” voices on the left who believe that the state should have the right to grab half of people’s marginal income (but no more) should actually be calling for big cuts to direct taxation.

The 50p tax cannot conceivably be seen as primarily a levy on “millionaires.” Of the 320,000 people who are expected to earn at least £150,000 in wages, bonuses, interest and dividends in 2013-14, around 18,000 will make £1m or more. As a result of tax reliefs 287,000 will pay the top rate of income tax this year: in other words, just 6.3 per cent of the 50p tax rate’s victims would be people earning £1m or more that year.

Waging war on the better-off is good politics for left-wing parties. But it is dreadful economics.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath

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