Think Tank Trashes UK 50p Tax Rate

by Jason Gorringe, Tax-News.com, London

25 June 2009

A new report by the Centre for Policy Studies examining the impact of the pending 50% rate of income tax argues that the measure meets none of the criteria for good taxation espoused by economist Adam Smith - fairness, simplicity, certainty and efficiency - and will undermine UK competitiveness at a crucial time.

Chancellor Alistair Darling, who admitted recently that he plucked the 50% rate out of thin air, says the new top rate, which will apply on incomes over GBP150,000, is needed from next year to help the government dig itself out of a deepening fiscal hole. He has also suggested that those who profited from the boom years should now do the right thing by paying a bit more tax. However, as with the withdrawal of tax allowances for those earning GBP100,000 or more, the CPS warns that, while this sounds ‘fair’ on the surface, it could lead to widely variable marginal tax rates reaching 61.5% for those earning between GBP100,000 and GBP112,000.

“The Chancellor’s Budget announcement of a 50p tax rate was a political manoeuvre to wrong foot the Conservatives, whose refusal to take the bait means that the economic and political case against 50p has not been made as strongly as it should have been,” said Jill Kirby, one of the report’s authors.

Neither will the measures be simple, the CPS says. According to the report, Finance Bill 2009 will bring about 16 different tax rates. Moreover, the departure from a 30 year trend towards flatter taxation, accompanied by the Chancellor’s hints of worse to come, will result in uncertainty about future taxation, the report warns.

The study also suggests that the new rate is unlikely to raise the substantial sums of revenue the government is hoping for.

"Aggregating the microeconomic impact of the new rate and its associated changes shows that both participation and wealth effects will result in much lower revenue than the Chancellor claims," the Centre said. "And even if the Treasury’s optimistic assumptions are accepted, the estimated revenue of GBP2.4bn is nugatory in comparison with current government borrowing requirements of GBP175bn."

“The new rate will be the highest in the G8 and will therefore put the UK at the bottom of the international competitiveness league for high earners,” the CPS noted. “The richest and most mobile members of the British population will have the greatest incentives to move abroad. The negative impact of the 50p rate will thus far outweigh its ability to reduce the national debt. Moreover, it threatens the UK’s ability to rebuild enterprise and restore its battered economy. It should therefore be abolished.”

Kirby concluded: “In his Mansion House speech last week, the Chancellor hinted that he may take further steps to penalize the better off. But it is time to recognize the long term damage that this political manoeuvring will do to the British economy – and abolish it as quickly as possible."

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