What the 50p Tax Rate Meltdown Tells Us

by George_East on January 29, 2014

Ed BallsOn Sunday Ed Balls made a speech to the Fabians.  Its primary message concerned Labour’s commitment to run current account surpluses by 2020 and, as a result, for the national debt to start to fall.    This has hugely significant (and from my perspective at least, pretty depressing) policy implications. I will write further about these shortly.

There was though another pledge in the speech: to restore the 50 tax rate for those earning more than £150,000 per year, on sums earned above this threshold.   This policy was primarily designed, I suspect, to create a wedge issue with the Tories at the next election.  It is, if you like, the equivalent of the Tories’ housing benefit cap:  a policy that is mostly symbolic and designed to put the Conservatives on the wrong side of the public over the contribution of the very wealthiest.   There is already a (correct) impression that the Tories go out of their way to favour those who are the best off.  By making the tax rate for the wealthiest a dividing line in the election campaign, this perception will be underlined.

That is not to say that the policy is not an important symbol of fairness or economically valueless.  It is an important symbol because in an era of austerity those who most contributed to causing the financial crisis (the bankers and professionals who advised them) are getting away with  virtually no consequences – whilst under this government VAT, which affects the poorest disproportionately the most, has been increased to 20%, the tax rate at the top was slashed by a whole 5%.

Further, despite what  even George Osborne was forced to admit at the time the tax rate  was reduced to 45%, the 50% rate did bring in extra revenues, contrary   to the earlier spin  in the Tory press that had paved the way for the cut.   Osborne accepted that it raised an additional £1Bn, which although not earth shattering is certainly significant enough (remember the proposed cuts to legal aid which will decimate the quality of justice in this country are designed to save £350M).   The tax take is likely to have been significantly higher if the 50% rate had been permitted to bed in.   As anyone who is self-employed knows it is not difficult to phase income in particular tax years on the basis of good accountancy advice.   The City institutions with high numbers of employees earning over the £150,000 per annum threshold simply deferred bonuses until the 45% rate was in place.

There is also very little evidence that the much vaunted (and largely mythical) Laffer Curve kicks in at anything like as low a rate as 50%.   Most research that has been done suggests that you need top marginal rates of around 70% or higher before there is a negative effect on overall tax take as a result of tax rates.   It should always be remembered that the most successful sustained period of growth ever seen in the western world, that of the first three decades after the Second World War, occurred when top marginal tax rates were far far higher than they are today.

So a 50% tax rate is not economically harmful and plainly not economically insignificant.  The take from it  though is a drop in the ocean compared to overall public spending or the total tax take.   No tax on income targeted just at the top 1% or so of earners is capable of raising sufficient enough sums to make a real difference.   In this sense wealth or property based taxes, like Vince Cable’s much touted mansion tax, are likely to result in a much more significant overall tax take. Also land has the huge advantage of being immobile and therefore relatively easy to tax.

However, to have read most of the newspapers over the last couple of days, you would think that Labour has proposed 100% taxes on the income of most of the population.   The policy to restore a tax rate that was in place until 2 years ago has resulted in a total meltdown.  George Osborne claims that as a result of Labour’s proposal, it is now the biggest threat to the continued economic recovery.  This is reported seriously by the Tory press.  Economic apocalypse is spoken of in columns and editorials, even though for the first 9 years of the Blessed Margaret’s reign, the top rate of tax was 60%.   How right wing commentators don’t find their head exploding with the cognitive dissonance of it all is a mystery to me.   How was all that growth and economic success that they claim for the Thatcher years achieved if the tax rate was 10 whole percentage points above the rate they now claim will cause economic disaster?

Scarcely can so much ink have been spilt in splenetic anger over what is to the overwhelmingly majority of people a tax rate that will never personally affect them.

As Charlie East-West wrote earlier today, the 50% tax rate is a very popular policy (that is as I said its primary point, form Labour’s perspective).  Yougov at the weekend found even a clear majority of Conservative voters (by 44% to 30%) backed its reintroduction.  You won’t find a whisper of this in the Tory press.  The whole angle of the coverage of the issue is that it is obvious, obvious I tell you, that reintroducing the 50p rate will be a disaster.

What this reveals about the right wing press is that it primarily exists to further the economic interests and financial position of its owners.  Most journalists (the senior editors and star columnists aside) will not be anywhere near the threshold to pay the higher rate themselves. Yet they are incapable of approaching the issue with even a modicum of perspective or honesty. They are instead marionettes for a tiny coterie of the uber-wealthy.   It is as demeaning to the journalists as it is utterly irrational.

But then, hey, when it comes to the British press, what’s new.

{ 3 comments… read them below or add one }

Fionauk512 January 29, 2014 at 10:24 pm

Moral midgets, the whole coterie.

Reply

Mike Killingworth January 30, 2014 at 9:48 am

This is the century of the 1%. The rest of us won’t legally be slaves, but we might as well be.

Reply

George_East January 30, 2014 at 12:37 pm

The thing is Mike I think it may actually ultimately be, like in the States, the century of the 0.1%. The New Feudalism.

Reply

Leave a Comment

Previous post:

Next post: