Why Cameron should ditch the 50p tax rate

TrevorsDen

I think the policy of not a priority is a good one.
Explain how you are putting taxes down for the richest and cutting services for the poorest.

At least before an election. Better to wait for the evidence (after the election) before making the point.

Lets all just FORGET about 50p shall we?

oldtimer

You are right; 50% tax is a stupid rate to charge on top incomes. I hear one way to get round it is to pay high earners, say, three years salary in advance before the new high rate kicks in and then for them to lend back two years to their employer, to be redeemed at the appropiate intervals.

The same thing is happening with businesses. They are migrating from London to Dublin, Zurich or wherever a better corporate tax rate is available. It is happening with all sorts and sizes of business from hedge funds to insurance companies.

It is time the stupid politicians got real and woke up to the sight and sounds of the flying golden geese.

Stephen

There's also the matter of the iniquitous and unprincipled cut in tax allowances on the next 1% of earners - those earning between £100K and £150K. Not a huge sum of money either way but a significant symbol of Cameron's willingness to (re)create incentives for the wealth creators who will rescue to country in the 2010's.

Uncle Bob

To be honest Fraser, I think the likelihood is that it will be dropped in Osbourne's first budget, they just don't want to set foot into Brown's trap until it has been safely de-activated. Once in downing street they can show the figures that indicate it will actually reduce tax take and go ahead. Labour could then scream about it all they like, by the time the following election comes about, they should hopefully have the data to back up their earlier action. And once they have the defecit under control they can look at reducing corporation tax, making Britain even more attractive to big business.

Jupiter

Why have you printed the same graph 3 times?

C

All the graphs are the same?

Kram Ekosum

Thank you Fraser. Please give us the list of countries...
Why has the same graph come out thrice? Is it really needed to drive the point home!? Sadly it is an old concept and has been proven decade after decade. Kennedy did something similar in the sixties however most on the "Left" forget it. In their defence we used to not have as much State Capitalism where corrupt businesses are simply propped up by taxpayers(all of us numpties). Ho hum.....

C

There are other ways to crack this nut - tax and benefits simplification programme for example. The Tories have hinted at this over the last few years (they announced a study into flat taxes in 2005 - whatever happened to that?)

Such a programme (not necessarily flat taxes) could arguable raise more revenue, save money by reducing the admin overheads at HMRC and help the private sector.

Jon

Your graphs are out - 2 and 3 are the same as 1!

J.

David

It would be interesting to see what would happen if, instead of reducing the tax rate, you made it harder to avoid through, for example, overseas accounts and other tax dodges.

Alf Tupper

Welcome back Fraser, here we go again: "The richest 1% in Britain contribute 24 percent of all income tax collected"

Which leaves them still the richest people in the country. Deprived of what precisely? They remain very lucky indeed.

Peter Buss

Just don't agree with you Fraser. Its not as though the 50p rate is squeezing the rich in the first place.Its still way below what Geoffrey Howe reduced it to under Maggie.
Stats can be used in a variety of ways and no doubt there are economists who would argue that it simply depends on where you set the rate for high earners. The Laffer curve is disputed in any event.

Essentially the British people are at heart a people who value fairness. When the less well off will be asked to pay more for less, find their wages are frozen, their services reduced and told rightly that as a Country we have to live within our means there is just no way that they will believe its fair that at the same time taxes on the richest are then reduced. I'm sorry Fraser but you will just have to pay up !

Frankly its political suicide for Cameron to go down the road you are suggesting/

AAE

I hope Uncle Bob is right, but Cameron's main strategy has been to woe and appease The Guardian and the BBC, and avoid saying anything that might attract criticism from them, or give even the tiniest hint that he dislikes the entrenchment of socialism in every crevice of our lives. How hard can it be to explain to the electorate that the increasing of the public payroll by about 800,00, and the web of tax credits etc. amount to gerrymandering on a vast scale? Public expenditure has doubled in ten years so how hard would it really be to cut, say, £100 billion? Either Dave doesn't see the acceleration during these last ten years of so many props of totalitarian socialism (I hardly need to list them for The Spectator surely?), or he isn't disturbed by it. However, given his lack of appeal to those of us who want to free of the wholly insidious tentacles of the state, he may find that the General Election is not as much of romp as he thinks.

JohnAnt

By all means ditch the 50p tax rate.
But for God's sake, bring in annual CGT taxes on property before every halfway decent London leasehold and freehold have been bought up as a BTL investment with cash from the taxpayers (via the banks) - much of it by foreign investors.
The unfair advantage of property over equity investment (CGT exemption for all except the terminally honest taxpayer) has skewed the market. As the MPs' scandal has showed, HMRC is incapable of any discernment in this area. Apply CGT to everyone, demand it on account yearly, and drop Stamp Duty, which penalises only the first-time buyer.
A universal annual CGT tax on property would stabilise the housing market and prick the price-inflation bubble which is now forming dangerously once again.

Pete Hoskin

CoffeeHousers: apologies for the repeated graph - was a weird technical glitch. Has been sorted now, and all the correct graphs are showing above.

Ray

Keep plugging these amazing graphs and statistics, Fraser. Your expositions are well on the way to becoming more eye-opening than "compare da' meerkat".

Red Rag

"To be honest Fraser, I think the likelihood is that it will be dropped in Osbourne's first budget, they just don't want to set foot into Brown's trap until it has been safely de-activated"...I do believe that is called lying to the electorate....who says the Tories have really changed?

Jonathan_T

Fraser - a timely revisiting of this topic.

From a technical angle it is of vital importance to encourage dynamic tax modelling and an efficient tax system. More importantly, as a political point about the type of society that Britain must aspire to be. (Low tax, efficient government spending, encouraging personal enterprise and business growth etc etc etc)

It is simply illogical to attempt to reduce and reform government spending to make it more efficient, without simplification and reform of the tax system.

To those that question the political wisdom of the move, I believe the Tories should use some political capital and make the simple argument that "reducing rates => more tax revenue => better for everyone".

jon

JohnAnt, I think you mean www.landvaluetax.org

bill

I think it is immoral for the state to take more than an individual does. That is why 50% for me is the very limit. That said, having paid pre-Lawson marginal rates above 50%, I don't feel much sympathy for those complaining about 50% tax rates. In addition from my own experience as a banker and a lawyer I know there are plenty of ways the rich avoid tax at 50%. Indeed the real problem is not a 50% marginal income tax rate but the fact that the poorest in our society suffer an effective (direct and indirect) tax rate higher than their wealthier fellow tax payers.

Mark M

Great graphs Fraser, and combine that with the inequality data and you see Gordon's great deception. What he gives with one hand, he takes back with the other. The poor are given enough money to convince them to vote Labour, and then they have it taxed off them. And the sad thing is, this works.

Emil

The 50p tax rate may or may not be fair. The disgraceful removal of tax allowances for anyone earning over £100K is another matter, and has everything to do about political posturing and nothing at all to do with fairness, and then when you add the unspoken NI hike that will royally screw people on modest incomes.. the whole tax system is a complicated, bloated mess, and some still refer to the moron who made it this was as if he were some sort of economic genius.

Cameron needs a complete radical shake up of the whole system, 50p is window dressing. Has he got the courage, vamos a ver, but I won't be holding my breath

John Moss

Lower tax rates equal higher tax revenues, agreed. Though the law of diminishing returns does apply and a zero % rate on every tax would raise, well, zero!

I agree with the premise of declining tax take for higher incomes. It is already firmly established with welfare "withdrawl" rates well in to the 60+% level.

Dirty Euro

In the USA in 1929 Hoover cut taxes for the rich from the 70's in % terms to the 20s in % terms. There was then a massive depression for 4 years. In 1932 the tax cut on the rich was reversed. The extreme capitalist model has failed. The balanced mixed economy socialist model is returning. It is right that extreme inequality must be stopped.

Andrew Cadman

Altough I generally agree with your argument the graphs themselves are unconvincing. They only deal with one form of tax - income tax. The very well paid often own their own businesses and therefore tend to minimise tax by being paid in share dividends. Naturally if you lower income tax rates then more will opt to be paid as a wage rather than a dividend. By itself it does not mean that total tax takes from the rich have risen.

JohnAnt

jon, Thank you for the link. I'd never heard of the Land Value Tax Campaign. I was simply pointing out that if residential property continues to be the taxpayer-aided casino investment bank of Everyman, then the pension funds will be starved, as equity investment in business and industry is heavily over-taxed in comparison.
It's rather as if the government were giving tax-funds to that bloke who charged 2,500% (which, come to think of it, they probably were, in one form or other) and penalising pensioners who buy shares in nuclear energy and bio-fuels.

Major Plonquer

I think everyone is missing the point. Brown has it absolutely spot on correct!

Obviously the poor are paying a proportionately higher percentage of their earnings to the state and the rich are paying proportionately less. Ergo we need more poor. Which is EXACTLY consistent with Brown's record and actions.

God bless the Poor. we need more like 'em.

Verity

Fiddling while Rome burns.

Craig Strachan

Yes.

Fergus Pickering

Is this not Reagan's famous Laffer Curve? It may be true, all right it is true, but that is not enough. There are plenty of things that are true which it is impolitic for a polician to say too loudly. For instance that Grammar Schools bring about better results; that paying girls to have bastard children just encourages them; that wars are good for the economy; that black people are not very good at Intelligence tests; that riches rot the soul and it is easier for a camel... Your graphs are fine, though the last one is a bit simplistic. Do we really wantto base our tax system on backward muslim countries full of the rotten rich men I spoke of before. Sometimes taxes are there just to encourage the virtuous, in this case the poor and virtuos who would be mighty pissed off to see the u8ndeserving rich (all rich men are undeserving, even including your good self) getting a hand-out even if...

Roger

I am more concerned that we classify those households earning less than 60% of average wages then subject them to taxes. If we raised the tax thresholds how much of the black market would suddenly become white again. Can anyone here do the sums?

BenM

Some highly dubious statistics here.

The issue is not the proportion of overall income tax paid by a certain sector of society - I'd always expect the rich to pay more because that is basic mathematics - rather, it is the proportion of that sector's income that they pay over in taxes.

It is clear the rich do NOT pay as much of their income over in tax as those poorer than them. If they did, I'd expect the proportion of overall income tax paid by them to rise, as well as the aggregate value of tax received by the Treasry also to rise.

Note that Mr Nelson has nothing to say about the massive budget deficits racked up by the US (and British administrations) in the bizarre rush to tax less the very people who can jolly well afford to pay a bit more.

Laffer is an illusion.

Laughing Gravy

This is Laffer's curve, or Laffer's hypothesis. In one sense it is true almost by definition. If the tax rate for a particular activity is zero it will generate zero total revenue - Laffer observed that if the tax rate is 100% it also generates total zero revenue. That will happen by evasion or by nobody undertaking the activity. He hypothesised that somewhere between 0% and 100% there is an optimal rate for tax revenue. Now to practicalities. In any given circumstance it is not obvious where the optimal rate should be set. Evidence seems to indicate lower, simpler, taxes optimise revenue but this is not necessarily true in all circumstances. In periods of economic growth it is probably true, in stagnation or depression it may be true it may not. It is at this point that raw politics needs to be considered. As a number of respondents have pointed out, to promise immediate abolition of the 50% rate may be good economic sense but poor politics. Because there is some uncertainity about the economics, but almost none about the politics, I would favour the opposition's line of ' not in the first budget'.

bill

John Ant notes that "as equity investment in business and industry is heavily over-taxed in comparison": I wonder what makes him think that is the case? As a former corporate financier I was constantly struck how despite the massive thicket of inefficient tax legislation, entrepreneurs could get off very lightly. Where I might agree with him is in that loading companies up with cheap and tax deductible debt (instead of equity) has not necessarily served the nation well even if a select bunch of investors and advisors have made a fortune over the last twenty odd years.

Bill Paisley

Sigh, not this lie again.

The recent the rich pay such a greater percentage of income taxt than (say) ten years ago is that the income gap has gotten larger.

Nick Kaplan

Dirty Euro

Could you explain your assertion that “It is right that extreme inequality must be stopped.” Why must inequality be stopped at all? And if inequality is so bad why must it only be stopped in its extreme form?

Ben M

“The issue is not the proportion of overall income tax paid by a certain sector of society... it is the proportion of that sector's income that they pay over in taxes.”

Isn’t it simply vindictive and envious to care more about the latter than the former? Surely all that should matter to those in lower tax brackets is that the rich pay the highest absolute amount of tax such that the share/ amount paid by the poor is a low as possible (This is what is rational and non-envious, whether it is moral to make such a demand is another matter). If one demands that the rich pay a higher proportion of their income, without regard for the fact that it will result in them paying a lower overall amount of tax (and therefore the poor having to pay a higher percentage of overall tax revenue to make up the shortfall) then one is merely being envious. Of course the 2 conditions may overlap, i.e. the highest proportion of overall income tax paid by the rich sector of society may also result in that sector paying the highest proportion of its income in tax, however the whole point of Fraser’s article is to show that this is NOT the case. The evidence shows that reducing taxes/ supply side reforms (at least up to a point) actually increases the overall amount of tax paid by the rich, hence reducing the overall amount needed to be paid by the poor. One must conclude therefore that either you are vindictive and envious (aka a socialist) or that you have failed to understand Fraser’s very clear and simple post (aka a moron).

Laffer is not an illusion, he’s a real person! Moreover the famous Laffer curve has a huge amount of evidential support and makes perfect theoretical sense. Of course reducing taxes creates a budget deficit in the short term if you don’t also reduce spending (Laffer doesn’t deny this!), the point is that long term growth following tax cuts will be higher meaning overall government revenue will be higher in the long run!

Trafalgar

You're forgetting National Insurance contributions - add those to the pot and the top tax rate is greater than 50%.

Osborne should combine tax and NI into a single code and make the combined top rate an even 50%.

He won't though. My guess is that the 50% top rate will stay until the tail end of a first term. Clarke and Hammond are keener to reduce the corporation tax rate in the belief that this will help to create jobs.

JohnAnt

Bill -
'"as equity investment in business and industry is heavily over-taxed in comparison": I wonder what makes him think that is the case?"'
I did say 'in comparison'.
To answer your question with another: What tax do you pay if you sell your main property? Right - zero, nada, zilch.
And if you sell your second property (having rented it out) but claim to HMRC that it was your first property?
Again, zero.
But what if you hang on to your property for 20 years and then sell it at a massive 1000% profit?
Yes, zero tax to pay.
And if you have made a fortune out of multi-rents but your properties have declined slightly in value when you sell them after a short period?
Yup, zero. You may even get a tax rebate.
My point is that this advantage (and HMRC's incompetency at tax collection) is skewing the asset investment markets and crippling the pension funds.
I wasn't thinking of hedge-funds and their unbelievably advantageous tax-arrangements supported by the Labour Government.

Edward McLaughlin

Nick Kaplan

If I understand you right, you argue that the rich have - and should have - some kind of veto over their liability to pay tax.

They don't, and the solution to any form of tax-dodging, is not to ask them for a more acceptable contribution, but to focus attention on that sector and pursue it more vigorously. If that doesn't work, focus more. If this leads to the mass flight of 'wealth creators' then we will just have to see if we can manage without their midas touch.

It would be interesting to see which countries might welcome a wave of people who reserve the right to withold contributions to the national pot.

Nick Kaplan

Edward McLaughlin;

I didn't argue, and don't believe, any such thing.

Edward McLaughlin

Nick Kaplan

How does reducing tax for the highest earners, lead to increased generation?

JohnAnt

Ed Mc - "How does reducing tax for the highest earners, lead to increased generation?"
Because they find it easier and more profitable to pay it rather than spending time and money in evading it, and because alternative tax jurisdictions become thereby less competitive so less attractive.

Nick Kaplan

Edward McLaughlin;

It's very simple supply side economics. Supply Siders point out that in the long-run our wealth/ income as a society depends on our ability to produce goods and/ or services that people value (which is why demand side economics in which value is artificially created fails disastrously in the long-run). Expansion in out-put is thus necessary for proper long term growth. One way to stimulate such an expansion in output is by reducing taxes, both personal and corporate. Such tax reductions decrease the costs involved in economic activity thereby boosting profits and incentivising entrepenuership, hard work and production, all of which lead to growth. Decreased taxes act as both an incentive (by making earnings higher) and as a stimulant for other beneficial economic activities e.g. investment, as those with more money obviously have more to invest. Moreover one must bear in mind the affects of trickle-down economics also; as entrepreneurship increases more jobs will be created increasing employment which likewise will result in increases in productivity (and reductions in government spending which could feasibly be fed back in new tax cuts).

It is also important to realise that when there is a ‘progressive’ tax system in which tax rates increase with earnings (but only on the excess earned) there is an additional affect of the marginal tax rate. If one is deciding whether to increase one’s workload in order to get into that higher tax bracket then the extent of the marginal tax rate will play a big role in one’s decision. To many people it will make a big difference whether the government takes 30, 40, 50 or more pence of every pound earned above a certain level. If that marginal tax rate is seen as too high for some individuals they will not make the decision to work harder and thus will produce less than they otherwise would have. Clearly the higher the marginal tax the greater the number that will decide not to increase their work load. The reverse follows, i.e. if the marginal rate is reduced then more people will be willing to take on additional work thereby increasing productivity and consequently increasing long term growth.

Additionally high marginal tax rates encourage wasteful and inefficient spending on tax deductible goods by making said goods cheaper than they otherwise would be. Thus if spending on an office is tax deductible the higher the tax rate the more is saved by spending your money refurbishing your office, money that might otherwise have been put to more productive but not tax deductable uses.

We should also not forget the important fact that we live in a globalised economy in which the rich are extremely mobile, tax them too highly and they will go elsewhere, tax them at the right level and they will leave other places and come and invest here!

That’s some of the theory, Fraser’s article provides some evidence and there is plenty more from across the world that indicates the long term success of tax reductions for the rich (and hopefully the rest of us as well!)