SO WHAT would you do if you were chancellor? Cut red tape, scrap taxes, subsidise industries or build toll roads?
The real chancellor is being flooded with suggestions about how to get the economy moving again, with almost no idea being left unproposed. Each day the pages of the papers are packed with stories about new policies or rows about new policies. But one suggestion that isn’t going away is scrapping the 50p tax. The tax has been described by the chancellor as “temporary”, but he hasn’t committed to actually chopping it. Lib Dem ministers are incapable of mentioning the tax without pouring cold water on the idea of killing it off.
The politics of the 50p tax were never easy, but the euro crisis has made them even more tricky. With the economic world up in flames, cutting tax for the rich might seem politically masochistic. The Occupy London protesters have sharpened resentment of the wealthy, and stories about excessive executive pay just pour fuel on the fire.
There are no votes in scrapping the 50p tax, but the reason it won’t go away as an issue is the economic damage it is causing to UK PLC. Business leaders warned in a letter to the Daily Telegraph about the destructive impact it is having. Tax advisers who used to spend their time telling the rich how to move to the UK are now telling them how to move overseas. I am told that you can’t get a place in English language schools in Switzerland for love or money.
The critical question for the chancellor is whether the tax actually raises any money. Her Majesty’s Revenue and Customs is producing its opinion, but whatever it says, it won’t be the final word.
A report out today by the Centre for Economic and Business Research highlights how dynamic the situation is, and how the thinking about the 50p tax is stuck in the past. The tax may indeed raise money in its first year, but that is likely to decline rapidly as taxpayers respond to it, and after three years, it will cost the government more than it raises. Within five years, it will cost the government about £1bn a year in lost tax – or nearly £40 per household.
A tax that loses the government money clearly fails the first test of a tax, but it is worse still if it succeeds in discouraging wealth creation. The report, The 50p Tax: Good Intentions, Bad Outcomes, suggests that increasing globalisation and technological advances have made high rates of income tax even more counterproductive than they were in the 1980s. People, businesses and money are far more mobile than they were even just a decade ago. Income management schemes make it easier for people to avoid paying high taxes, so that they raise less money. On top of this, while the UK has been raising its income tax, other countries have been cutting theirs, making our relative competitive position even worse. In total, it suggests the rate that would raise most money is now below 40p – which is why the 50p rate will cost the government money. The politics of the 50p tax are indeed difficult, but taking difficult decisions is what we employ politicians for. If I was chancellor, I know what I would do.
Anthony Browne is former director of Policy Exchange: firstname.lastname@example.org