The case for the 50p tax rate – John Leech writes

As far as tax changes are concerned, the Liberal Democrats have a lot to be proud of. At the last election our manifesto commitment on tax was to take the poorest taxpayers out of paying tax altogether, so that nobody would pay income tax on earnings below £10,000. The Tories promised  to raise the threshold for inheritance tax to £1 million.

In Government we will deliver our pledge to raise the personal allowance to £10k, a year ahead of schedule. This is no mean achievement for a party of Government with less than 10% of MPs.

I remember speaking to Danny Alexander a couple of years ago and saying that once we reached our manifesto commitment that we ought to then have in the next manifesto a commitment to take everyone on the full-time equivalent of the minimum wage out of paying income tax. (So when this appears in the manifesto, it wasn’t Danny’s idea!) If we end up in Government again after 2015, I fully expect us to deliver this too.

But this is not the only tax policy that we have delivered – changes to capital gains tax and closing tax loopholes to tackle avoidance, have resulted in billions of extra tax revenue to the Treasury. But then there is the “elephant in the room” of reducing the top rate of tax from 50p to 45p. Don’t get me wrong, I have certainly not forgotten that the 50p rate was a cynical last ditch attempt by Gordon Brown to appeal to Labour’s so-called “core vote”, and that the highest rate of tax was 40p for nearly the whole of their time in Government. I have also not forgotten that the Tories actually wanted to reduce the top rate of tax to 40p, and that they had no real interest in raising the personal allowance, until they realised how popular the policy was with the voters. The reduction in the 50p rate was a compromise to deliver our manifesto commitment on tax and we have delivered it.

The problem, however, is that slashing income tax for people earning over £150k is pretty unpopular with millions of people who hear “we’re all in it together”, but then see income tax cuts for millionaires, while benefit increases are capped at 1% or their pay has been frozen for 3 years. It does not matter that all the tax changes mean that the richest are actually paying more – nobody really understands the closing of tax loopholes or capital gains tax, while the rate of income tax is very easy to understand, and fits nicely on a leaflet or a billboard.

We can continue to point out that reducing the 50p rate was the Tory priority, not ours, but everyone knows that a skint Government has delivered a tax cut for millionaires. The only way that we can disassociate ourselves from this top rate Tory tax cut is to commit to reintroducing it. Most people I speak to, whether inside or outside of the party believe it is the right thing to do. Opponents of the 50p rate argue that it does not raise any money, or at best, very little. This is only because of systematic tax avoidance on an industrial scale. Rather than take the view that people will simply avoid paying it, HMRC should do their job properly and actually levy the tax that is due.

I do not advocate a reintroduction of the 50p rate at the expense of a Mansion Tax. We ought to be arguing for both. I fail to believe that there will be a mass exodus of wealthy people leaving the country. This has always been a myth. What it does is show the Liberal Democrat commitment to fairness on tax, and proof that the cut was a compromise to the Tories so that we could deliver a tax cuts for millions of low paid workers.

 

 

 


 

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3 comments on “The case for the 50p tax rate – John Leech writes
  1. John,

    There are currently two income taxes in the UK, one is called income tax and the other is called National Insurance and I suggest that before tinkering any more at the edges of income tax we should integrate income tax with NI.

    The lower earnings level is for NI is currently set at around £5668 per annum, and a heck of a lot will be done for the poorest workers if that were raised along with the threshold for income tax to equal the National Minimum Wage.

    This would also mean that the National Minimum wage would be marginally higher than the national living wage (which takes taxation into account and therefore would be lower than it currently stands if less tax were being deducted).

    You say the highest tax rate is 45%, but actually if you look at the combined tax and NI rate the highest rate is 57%. Oddly this only applies to people earning between the UEL for NI (£41,444 and the higher tax threshold (£41,451) but this is still a ridiculous anomally that would be sorted if we equalised the UEL and higher tax threshold.

    The increase of of tax on earnings above the upper tax threshold to 50% would although being symbolic not actually be that great a jump (3%).

    However this leaves us with the anomally that you jump from 0% to 20% to 50% with the jump to 50% at a fairly arbitrary point, so maybe it would be better to have a 10% rate on earnings between the threshold and the average earnings, 30% on earnings between average and twice average, 40% on earnings between twice average and three time average and 50% on earnings above three times average.

    If we also took the average as being the aggregate average income of Men and Women it would mean that the more that womens pay was brought up to be in line with mens pay the higher the tax break for the people at the top, and similarly that the tax break for people at the top would be highest when part time pay equalled full time pay.

    This personal incentive in their pockets might do more to secure fair pay in this country than all of the legislation of the past 50 years has failed to do.

  2. Andrew Toye says:

    The problem with integrating NI and Income Tax is that it would further erode the progressive case for social security. NI is an insurance like any other (except that contributions are progressive rather than based on cost or risk.) Of course raise the NI threshholds to match Income Tax, but let’s change the narrative on welfare and defend the insurance principle.

  3. Matt Burrows says:

    If I remember correctly the 50p rate cost the Exchequer more than it raised. According the HMRC had done some work on this´s own figures suggest it cost ₤1bn owing to forestalling of tax liabilities since many/most of the people that were on this band were self-employed. http://www.hmrc.gov.uk/budget2012/excheq-income-tax-2042.pdf. Also http://www.accountingweb.co.uk/…/526406

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