Killing the goose that lays Golden eggs

Allister Heath

HERE are a few facts that Chancellor Alistair Darling should bear in mind as he prepares to hit the financial services industry and high earners with even higher taxes on Wednesday. The top 10 per cent of earners are already set to pay 53.6 per cent of income tax in 2008-09; the top five per cent will pay 43 per cent and the top one per cent 23.9 per cent. Yes, that’s right, just one per cent of the population will pay close to a quarter of the total income tax take, funding a massive chunk of the welfare state – who ever said the rich don’t pay their “fair share”, whatever that means?

In 1988, when Darling’s predecessor Lord Lawson slashed the top tax rate from 60 per cent to 40 per cent, the top one per cent paid only 14 per cent of total income tax receipts. Lower tax rates and globalisation helped trigger an explosion of wealth and turned London into a magnet for foreign talent; in turn, this led to an explosion in the tax take. Arthur Laffer, the father of supply-side economics, was right after all, a lesson New Labour learnt but that the government (and the Tories) have now forgotten. As recently as 1999-00, the top one per cent paid 21.3 per cent and the top 10 per cent 50.3 per cent of income tax; their share has been going up without higher rates. Lesson number one: a chancellor who wants to maximise his tax take should allow the rich to get richer, not chase them away with punitive attacks.

The financial sector accounts for 25 per cent of total corporation tax receipts and nine per cent of total wages and salaries, bolstered by bonuses; their contribution to income tax and national insurance is even greater.

Lesson number two: while we must prevent another financial crisis, Britain would be bust without the City. Finance needs to be encouraged to grow sustainably in Britain – not be chased away by class war and punitive taxes.

For once, I actually agree with the government. Taxpayers are underwriting £282bn in RBS assets as part of the asset protection scheme (APS); but because the first £60bn in losses will be born by the bank, the government doesn’t believe it will have to fork out on the policy. Contrary to what other commentators are arguing, that seems about right to me. In fact, I suspect that RBS’s remaining write-offs won’t be as large as predicted and that taxpayers will make more money back on the reprivatisation of Lloyds and RBS than many think. This is not a defense of the APS, which was always an ill-thought out scheme; it is even less a defense of RBS or of its disastrous boss Sir Fred Goodwin. When politicians criticise “the banks” for reckless leverage, hubris, stupid purchases of bundles of sub-prime mortgage or excessive lending to dodgy countries, the only UK institution that really fits the bill is Goodwin’s RBS. Bradford & Bingley was small fry; Northern Rock didn’t understand that you need deposits if you want to lend out mortgages; HBOS lent like crazy against commercial property and was brought down by old-fashioned stupidity; but it was RBS that really destroyed the reputation of everyone else in the City with its massive subprime exposures, overpriced acquisitions and insane lending. The errors of its previous management – for years feted as heroes, with Goodwin rewarded with a knighthood by Gordon Brown – is what everybody else will be paying for on Wednesday.