Cameron Hints Tories Will Drop UK's 50% Tax

by Robert Lee, Tax-News.com, London

06 October 2009

UK Conservative Party leader David Cameron has given his strongest hint yet that a future Conservative government would reverse the planned creation of a 50% top rate of tax from next April, although he reiterated his belief that this should only be done if fiscal conditions permit.

In an interview with Spectator magazine, Cameron said he was opposed to high rates of marginal tax in principle, describing them as a “fantastically bad idea.”

"You don't have to persuade me that high marginal tax rates are a bad idea,” he said. "The sort of tax system I believe in is one that's effective in raising revenue, rather than one that's trying to make a particular point.”

The proposed 50% tax band was announced by Chancellor Alistair Darling during the last budget and it will apply to incomes of more than GBP150,000 per year from April 2010. However, Cameron initially refused to take the ruling Labour party’s bait in opposing outright, denying them the opportunity to accuse the Tories of being a ‘tax cuts for the rich’ party. But Cameron now says that unless the 50% tax actually succeeds in raising additional revenue for the over-spent Treasury there is little point in persisting with it.

Recent studies suggest that the 50% tax will raise little or no revenues as wealthy taxpayers will have the wherewithal to avoid it, either by working less, working abroad, or through tax planning.

“If you're right that it raises no revenue, even in the short-term, then clearly it would be painless and advantageous to get rid of it," Cameron told Spectator. Nonetheless, the Tory leader was keen to emphasize that "fiscal responsibility" will be the watchwords should he become the next Prime Minister. A general election must be held by next June at the latest.

According to a survey of 350 small and medium-sized businesses by research from UK accountancy firm MacIntyre Hudson, just over three-quarters (76%) of respondents argue that the tax increases for high earners already announced by the Chancellor – including the withdrawal of personal allowances for those earning over GBP100,000, the new 50p top rate of income tax, and restriction in pension relief for those earning GBP150,000 – will reduce the incentive for entrepreneurs to work hard “beyond a certain point”. Over a third (39%) claim that they personally will put less effort into 'going the extra mile' in their own business.

Earlier in the year, a study by the Institute of Fiscal Studies (IFS) concluded that the 50% tax band would raise far less in revenue than the government’s target of GBP2.4bn annually. Even if the Treasury is correct in predicting in judging how people will respond to the rate increase, the IFS study suggested that this reform would probably raise only around GBP550m once the loss of VAT and other indirect tax revenues is taken into account.

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