he – or won’t he? There is mounting speculation today that George Osborne will slash the top 50p tax rate, either back to 40p or possibly to 45p. The move could be preannounced at next week’s Budget or happen as early as the coming tax year. The changes would be accompanied by an increase in the zero-tax personal allowance, as well as a crackdown on tax avoidance. Tories and Lib Dems are still horse-trading furiously. The Budget will be delivered next Wednesday; I suspect the final decisions will be made on Tuesday evening, just before the final document is sent to the printers.
Osborne should be bold. High tax rates are wrong. The 50p super-rate doesn’t work and was only designed as class war gesture politics to embarrass the Tories, who were too scared to oppose it. In the short run, it raises little or no money; in the long run it hurts competitiveness and makes the tax base smaller. Whenever I talk to a senior business executive, entrepreneur, recruiter or job-creator, I almost always hear the same story: our punitive and unfair tax rates are bad for business, bad for foreign investment and bad for jobs. Talented international executives no longer want to work here or demand a premium to do so.
The tax was only introduced a few weeks before the last general election; for over 99 per cent of Labour’s time in office, it was at 40p, where Lord Lawson rightly cut it in 1988. That is where it should now return. What makes the system even more pernicious is the addition of national insurance, nowadays a misnomer and merely a second, stealth income tax. The real tax rates are 42p and 52p; the rate shoots up to 60p between £100-116k. It gets worse: the total top tax on labour, including employers’ national insurance, is 67 per cent between £100k-£116k and 58 per cent above £150k. The top rates are inexcusably high – but that is also true of the 42p rate, which in fact amounts to a total labour tax of 49 per cent. All tax rates are too high in Britain; everybody hands over too much of their hard-earned cash to finance our oversized and wasteful state.
Eliminating the 50p rate would be an unpopular move as it is only paid by those in the top one per cent of incomes and we live in a society where most people hate those who have more than them. That is true even though the top one per cent pay 27.7 per cent of all income tax on 12.6 per cent of total income. But Osborne should put economics before politics: cutting the tax would be good for growth and jobs, and hence over time will help him. He should take the short-term hit and go the whole way. He mustn’t stop at 45p, because of the risk it would never fall further from there.
Osborne’s reform must go hand in hand with cutting tax on the poorest. But he shouldn’t forget strivers in the top 15 per cent of earners who pay the 40p tax rate. They too need to be encouraged. It is imperative that no new wealth taxes are introduced in “return” for any income tax cuts. Britain is an astonishingly over-taxed country. Tax loopholes should be shut. But there should be no new taxes and no tax hikes.
Osborne should announce a vision for a lower tax society for all Brits, rich or poor, to be phased in over the next few years – and he should announce that the public sector will find greater savings to ensure that his deficit reduction plan remains on track. Now is the time for Osborne to announce a real change of direction.
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