Comment: A 50p top tax rate just doesn’t make any sense

Forget the rhetoric about the rich not deserving a tax cut. The 50p top rate just does not work.

By Rory Meakin

The 50p top rate of tax is unsustainable and must be abolished. Very few would look at the tax system and think that those earning over £150,000 per year are the most deserving cause for a tax cut. Those directly caught by it are very well off, the richest one per cent in the country. But there's more to what's right and wrong, what's fair and unfair than simply deciding that, at first glance, a policy hurts the rich and concluding it's not a problem because the rich can afford to pay. The problem with the 50p rate is that it simply doesn't work. And it doesn't just affect those who pay it. It affects everyone else, too.

The primary objective of tax is to raise revenue. The 50p rate fails this most basic of objectives. Most analysts believe that the amount of tax revenue the Treasury loses because of the rate is about the same as the extra revenue it brings in. The higher rate makes working in Britain less attractive than in other countries in a number of ways. Some high earners have decided that enough is enough and have left Britain and moved to the Channel Islands, Switzerland, the Middle East or Asia where taxes are much lower. There has not been the exodus that some had feared, but some have already gone in the 16 months since the tax was introduced. Others might not have left yet but will be planning to when the time is right, perhaps they are waiting for a child to finish school or for a project at work to finish before looking for a new job abroad. Likewise, some migrants who might have considered moving to Britain with tax at 40% will have decided that handing over 50% to the taxman is just too much when in, for example, Singapore the rate is 20%.

Calculations by groups such as the TaxPayers' Alliance, the Institute for Fiscal Studies and the Centre for Economics and Business Research have found that the net effect of the rate is somewhere between a very small gain and a considerable loss. Forty per cent of something is bigger than 50% of nothing, after all. The problem, for revenue raisers, isn't just that people might pack up and leave, either. They may just decide to work less, take fewer risks and spend more time in the garden or on holiday. Higher taxes also mean it makes more financial sense to hire clever accountants to dream up tax avoidance schemes. Suddenly the payoff is a lot bigger, so we can be sure the use of these will be rising. Naturally, the same logic also applies to illegal tax evasion, too. All this has wider implications than just the effect on Treasury coffers.

Many ordinary jobs, too, especially in London and the south-east, rely on Britain remaining attractive to internationally-mobile high-earners. Hotel and bar staff, waiters, drivers, nannies and retail staff are all disproportionately dependant on high-income customers, as are the services of architects, lawyers, estate agents and financial services providers. And none of that is to mention the jobs directly created by the entrepreneurs whose businesses have become successful enough to make the owners liable for the tax.

A message is communicated in the 50p rate that risk-taking, ambition and hard work are to be punished rather than celebrated and encouraged. That's because the rate isn't really about raising revenue to pay for government services. Everyone knows it barely raises any, if at all. No, the 50p rate is about the bone-headed use of tax policy to manufacture financial pain for the well off in the name of fairness because the less well off are being made to suffer from tax rises, too. There's nothing fair about that.

Rory Meakin is a research associate at the Taxpayers' Alliance.

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