All tax rates are too high in Britain

 
Allister Heath
IT was good to see yet more entrepreneurs and small business owners joining in the campaign to scrap the 50p tax rate yesterday. But supporters of the tax were also out in force yesterday; they deployed three main arguments. The first is that “bankers” (in modern parlance, anybody who works in finance, including fund managers, traders, investors, corporate lawyers, private equity folk and even some accountants) are the ones being hit by the tax, and that such people should count themselves lucky that the top rate is just 50p. In other words, the usual rabid anti-City hatred. Given that the overwhelming majority of City workers didn’t cause the bubble, such a slur is preposterously unfair.

But the argument is also wrong for another reason. At last count, only 23 per cent of 50p taxpayers worked in financial intermediation. In March last year, Sir Nicholas Macpherson, permanent secretary at HM Treasury, revealed to the House of Commons Public Accounts Committee that of the 275,000 paying the new 50p tax rate at the time, only 63,000 work in “financial intermediation.” The remainder is made up of entrepreneurs, senior executives in every part of the UK manufacturing and services industries, consultants, lawyers, some IT contractors, authors and entertainers, sports stars, top medical professionals and many other kinds of people. All successful people are being hit, not just bankers.

The next argument is that those on high incomes don’t pay their fair share. The evidence shows this to be untrue, except, of course, if you are a Marxist who believes in entirely eliminating inequality and seizing all of the top earners’ income. The top one per cent of taxpayers (who roughly coincide with 50p tax rate payers on £150k or more) are expected to have earned 12.6 per cent of total income in 2011-12, down from 13.4 per cent at the height of the bubble; they will have paid a massive 27.7 per cent of all income tax, a new record. Without the top one per cent’s tax payments, the welfare state would collapse and the UK would go bankrupt; they pay for a disproportionate chunk of public services. In fact, they pay for a greater proportion of the welfare state than ever before. How much more do activists want these people to contribute? They pick up over a quarter of the bill – should it be half, or even all of it? How would that be “fair”?

The third argument is that there is no evidence that the tax will hit growth and jobs. Again, that is nonsense. There are dozens of studies conducted by researchers all over the world that demonstrate that high marginal tax rates on income and capital do have a negative effect; there are also lots of studies that show that above a certain level at least increased public spending as a share of GDP reduces growth.

It is clear that the 50p tax rate (52p when employee national insurance is added) is damaging and has to go. But it is also true the 40p rate is also too high: it now hits millions of workers (and is actually 42 per cent when employee national insurance is added, and more if the 13.8 per cent employers’ contributions are included, a point that is also applicable to the 50p rate). All income and national insurance tax rates are too high in the UK. Britain is a thoroughly over-taxed country – and until it ceases to be taboo to say so, we stand no chance of once again building a truly dynamic and competitive economy.

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