Make the 50p tax rate less taxing, say economists

20 economists have written a letter to George Osborne suggesting it's time to scrap the 50p top rate of tax. Although it's always just been a question of when.

by Emma Haslett
Last Updated: 07 Sep 2011
The 50p rate of tax paid by the nation's biggest earners is courting fresh controversy today, after a group of 20 of the country's most respected economists wrote a joint letter to the Financial Times saying the Chancellor should scrap it as soon as possible. The tax has been a contentious issue since it was first introduced by the Labour government, with commentators pointing out that it would cause a major HR nightmare for UK plc, which would have trouble enticing the top talent to the UK. Even the Chancellor has admitted he isn't enamoured by the tax. So the debate isn't really whether he'll scrap it or not - it's more a question of how, and when.

The 50p tax rate applies to those earning £150,000 or more - that's about 308,000 people, or 1% of the nation's earners, who apparently pay just under a quarter of total income tax. By now, most people are familiar with the arguments against it: it's anti-competitive, prevents UK companies from recruiting the best leaders and, ultimately, could lead to a mass departure of big business out of the UK. And although that hasn't necessarily transpired, the economists in question (who include former MPC members DeAnne Julius and Sushil Wadhwani) argue that there has been a mini-exodus of hedge funds to Switzerland.  

When the tax was first introduced, Labour made clear it was intended to be temporary (then again, that's what Pitt the Younger said about income tax). And George Osborne has already indicated that he doesn't particularly like it, saying that 'people, frankly, can move'. So it's no coincidence that he's commissioned the Inland Revenue to look into the tax and find out how much it's raising: presumably, the hope is that it'll discover it's costing the Treasury more than it's bringing in, thus providing a nice, neat excuse to scrap it.

Of course, chances are things aren't going to be quite as easy as that. And if he does decide to scrap it, Osborne risks angering the masses: at the moment, wider sentiment is that it's the rich who got us into this state in the first place, and that they should thus shoulder their share of the burden of getting us out again. The TUC captured that quite neatly when it said it would be 'monstrous' to scrap it now. The Lib Dem side of the coalition aren't all keeen on the idea of dumping it either.

As with all these things, though, the argument isn't quite as straightforward as that. By narrowing the pool of leaders they can recruit, the tax may well be restricting the growth of UK plc - thus restricting the growth of the economy, thus preventing businesses from creating jobs. Which the TUC should be even more concerned about. Although MT would rather not be the one to tell that to those affected directly by the collapse of Lehman Brothers, etc.

Still - even the TUC seems to agree that once the economy has recovered, it might be a good idea to get rid of the tax. Although that might be a little further away than we had anticipated, after Germany's constitutional court ruled that all future eurozone bailouts must be subjected to approval from the German parliament before they go ahead. The good news, though, is that the court also rejected challenges to Germany's ?110bn rescue package for Greece, and the cash it put into the brilliantly-named €440bn European Financial Stability Facility. Phew. There was a risk its ability to prevent fragility would cause hostility.

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