Rates above 40 per cent push high earners to avoid paying by moving abroad or by resorting to a range of legal steps to reduce their tax bill, the think-tank said ahead of Wednesday’s release of its Mirrlees review of the tax system.
The 50 per cent tax on income above £150,000 was introduced in April 2010, and national insurance contributions make the effective tax rate higher still. Rows have developed as chancellor George Osborne considers whether or not to cut the tax back to 40 per cent in a bid to boost growth, or retain it to make high-earners pay more towards reducing the budget deficit.
Nigel Lawson, chancellor under Margaret Thatcher, cut the top rate of income tax from 60 per cent to 40 per cent in 1988. Over the next 11 years the share of income tax paid by the highest-earning one per cent rose from 14 per cent to 21 per cent.
“Cutting the top rate could help increase revenue. The government cannot afford to ignore lessons of past decades in these economically fragile times,” said Mark Littlewood of the Institute of Economic Affairs, which influenced Conservative party thinking in the 1980s.
In another report, released today, the IFS warns that the UK is only just starting to suffer the worst effects of the “great recession”.
Its study argues that while “unusually generous increases in financial state support” softened the blow, more pain is to come.
“Average living standards looks set to decline until at least 2013-14, as governments attempt to repair their finances,” the study reports. “The pain was most definitely delayed, rather than avoided.”