The time for Osborne to shed Brown's 50p rate is now
Fraser Nelson 12:38pm
Will George Osborne have a better chance to abolish the 50p tax than this month’s
Budget? It would be unpopular, so it’s the kind of move he’d be unlikely to make before an election. The Lib Dems have something they want to trade: permission to raise the tax
threshold towards £10,000. And two recent reports, by the CEBR (pdf) and IFS (pdf), have reinforced that this tax is losing money. At the heart of the 50p tax is a deeper question: is Osborne a transformative Chancellor
who will change the terms of debate? Or is he doomed to operate within parameters set by Gordon Brown? I look at this in my Telegraph column today. Here are my main points:
1. The super taxpayers… Even Brown knew that Britain is highly dependent on a tiny number of very rich (and very mobile) people. As The Spectator’s leader revealed last month, the richest 1 per cent earn 13 per cent of salaries paid but contribute 28 per cent of income tax
collected. This is what you might call a ‘fair share’:
2. …a lot of them immigrants. It was Brown’s greed for tax revenue that led him to leave the top rate untouched: he knew that, in our globalised world, countries
compete for people. For a while, the walkway to Heathrow Airport had an HSBC campaign listing the top rate of tax in various cities — a nod to the fact that passengers had a choice. In this
flat world of ours, people and their businesses can be based anywhere. This was true in the 1980s: the first Sunday Times Rich List (1989) showed that just 11 of the top 100 were immigrants. But in
1988 Nigel Lawson lowered the top rate of tax from 60 per cent to 40 per cent and Britain became a magnet for the world’s talent. The latest Sunday Times Rich List has 16 of the top 20 as
immigrants. Brits may well want to stay near to friends and family: it’s the Indians, Japanese and Americans who may be tempted to move.
We should add to this Brits who have roots in many tax jurisdictions. They can choose where to do business (or declare tax) like never before. Appallingly little research has been conducted into
the rich, on whom the UK government so heavily depends.
3. Osborne’s Achilles Heel. Brown had another theory: that Osborne and Cameron’s greatest fear was an attack on their own backgrounds. His direct ‘toff’
attack backfired, but he found a new way to torment them. He figured he could have them sign up to any attack on the rich — because they would never dare oppose him, then or in government.
When the Tories didn’t oppose a 45p tax, Brown jacked it up to 50p — and still no opposition. When Osborne said it’d have to wait to be abolished, he accepted Brown’s
central fake premise: that the tax raised money. In fact, Osborne increased National Insurance so its now a 52p tax. He is precisely where Brown wanted him.
4. How the Treasury faked the 50p tax studies. Brown’s power lay in his mastery of detail. He made his arguments by knowing, and then rigging, the system. He had the Treasury
civil servants claim the 50p tax rate would raise revenue by tweaking the formula which governs it. The IFS sent a Freedom of Information request to reveal the dodgy maths. The Treasury assumed
that the responsiveness rate of the rich — the so-called Tax Income Elasticity — was 0.35. This is a low figure, plucked from the air to allow Brown to claim the 50p tax would raise
£2.7 billion:
So what’s the real figure? The IFS calculate that it was 0.46 in the 1980s, and even if the rich had become no more mobile (unlikely, given the arrival of globalisation) it would lose
£500 million. The below is how the 50p tax yield changes, depending on your assessment of the Tax Income Elasticity.
So where do we lie? The coming Treasury review into the 50p tax will could include studies into the experiences of the (many) other countries who have the top rate of tax back Britain’s old
40p rate. Some estimates put the TIE as high as 1.0 — which would suggest Britain is losing billions. Plus a less calculable effect on our reputation as a place to do business.
5. A flaky Treasury study? Osborne has commissioned a Treasury study into this, which I fear will be bogus. We have only a year or so's worth of data to go on, and as California
found out a decade ago it’s impossible to separate the effect of a crash from that of the panic tax hike that often follows. Calculating the TIE is the only real honest way to do this
assessment, and every TIE is an estimate. They can be ones grounded on fact (like the IFS did) or plucked from the air (like the Treasury study making the case for the tax). There are rumours that
Osborne is planning a Brown-style list of ‘five tests’ for abolishing the 50p rate, which would be vulnerable to attack because the figures don’t stand up to scrutiny.
6. Abolishing the 50p tax needs a strong Chancellor capable of setting the agenda. Michael Gove once observed that history is divided between transformative Prime Ministers, who
change the terms of debate, and fag-end Prime Ministers who just trundle along the same lines as their predecessor. And here is the paradox: Osborne is widely regarded as one of the best
Conservative talents for years, yet he’s still singing using Brown’s autopilot machine. I think he ought to have more confidence in his own ability to change the debate, as Lawson did
in Britain and JFK did in America. Thatcher, at first, was very cautious: she only got going a couple of years into her government. Maybe Osborne will too, and the next Budget will be his
declaration of independence.
The 50p tax is totemic. Brown only ever intended it to hang around Osborne’s neck as a reminder of who’s boss. This month’s budget is perhaps the best chance Osborne will get to throw it away — and, finally, set his own terms of economic debate.
Previous
DavidDP
March 2nd, 2012 12:56pm Report this comment"The 50p tax is totemic"
Indeed. Floating voters struggling to make ends meet will note the right consistently demanding a tax reduction for the higher paid, with the Left taking about droping taxes for the less well off instead.
One can only imagine the electoral implications of this.
tb
March 2nd, 2012 12:59pm Report this commentAnd don't forget the marginal 62% rate which hits aspiration at £100,000
Paul
March 2nd, 2012 12:59pm Report this commentCouldn't agree more, but won't the Lib Dims stop it getting through? The ghastly Oakeshott is still carping on about mansion taxes, and Labour would certainly vote against it, whining on about how Osborne is helping "his mates"
Chris lancashire
March 2nd, 2012 1:04pm Report this comment"It [scrapping the 50p tax rate] would be unpopular" - only because the politics of envy prevails in this country and only because Labour would leap on it to score points.
As you rightly point out in your excellent Telegraph article, why did the Scottish loon leave it to the last six weeks of his long, long tenure in office before introducing this pernicious tax?
The damage that idiot did to this country's economy is almost incalcuable.
Unfortunately, I doubt that the Coalition has the political guts to do the Right Thing.
johnfaganwilliams
March 2nd, 2012 1:20pm Report this commentI'd love to think Ozzy has the balls for this - but if he has why didn't he do it within 90 days of getting his backside into the treasury chair? They could have got away with anything then - and it would have been forgotten by now. If the conservatives are going to be governed by the politics of envy rather than what's correct for the country where are we going? Cameron's on the tv telling us how awful it is that the EU won't adopt his growth proposals for Europe - while his best mate is sticking to the high tax regime that Bozo Brown left behind as a bear trap. Tax is simply killing enterprise in this country and nothing is going to happen to get growth until it is drastically reduced.
telemachus'
March 2nd, 2012 1:21pm Report this commentPoint 6 is spurious
There is more to good chancellorship than economics and no wise words or projections will get rid of the view that Osborne is a Chancellor for the rich if he moves
PS your choice of photo is clearly disingenuous
MilkSnatcher
March 2nd, 2012 1:29pm Report this commentThank you Fraser, your award of LibDem of the year is definitely toast but perhaps you no longer care.
The TIE can be divined from historical studies, including Sweden, Wilson/Callaghan et al.
As you neatly put it, this issue now a question of bravery. Osborne should summon up his past glory of the IHT threshold and ignore the Fabians around him.
Tiberius
March 2nd, 2012 1:48pm Report this commentJust back from reading you in the DT today, Fraser.
You have always been right about the economics of 50p tax, but it is for Osborne to judge to politics. You also championed honesty over the cuts, and when the Tories came out in late 2009, their poll ratings started to suffer. It is tragic, but Labour still does have natural bias in their arguments over issues such as these, and we saw more evidence of this on QT last night.
BTW David Starkey's wit is brilliant. If only so many others hadn't had charisma bypass operations (yes you, Jo Swinson, and the Labour woman).
REPay
March 2nd, 2012 1:50pm Report this commentYou would think that Cameron and Osborne might use their expensive educations that make the case for a reduced tax rate. Bankers and others on 100k plus pay for nurses, teachers, and people like Milliband who have lived off the public purse all their lives. A really huge bonus might even pay for a senior civil servant's unfunded pension for a few months!
Chris lancashire
March 2nd, 2012 2:06pm Report this commentDavidDP: You might just have some sort of point but for the fact that this tax is, in all probability, losing revenue and hence not taxing your fat cat target.
HampsteadOwl
March 2nd, 2012 2:09pm Report this commentI think the cause is lost. Judging by the photograph with which this article is illustrated, George Osborne has started to turn in to Gordon Brown
Wily Trout
March 2nd, 2012 2:10pm Report this commentScary pic, but I think the other way round (Osborne's hair, Brown's face) would be scarier - straight out of the Adams family...oh go on.
m wood
March 2nd, 2012 2:15pm Report this commentPerhaps a "sofly softly..." approach would work?
If the chancellor increases the lower rate tax exception by a little more than planned by the 2015 agreement in this coming budget, then he could say its perfectly reasonable to reduce the 50% rate to say, 47%, this year, That would, in effect, be a commitment for further reductions. How could the Libdems object?
The Crunge
March 2nd, 2012 2:24pm Report this commentWill this country ever be free of the incubus that is Gordon Brown and will we ever, ever stop paying for the political opporunism of this arrogant, bullying coward? Go for it George because "he who dares wins Rodney". It would be interesting to hear what our left-wing readership think of Fraser's proposal but they are, no doubt, either to bone idle to comment, incapable of rational thought or busy scrounging benefits.
R2-D2
March 2nd, 2012 2:36pm Report this commentThe government should raise the tax thresholds and fund it by cutting the 50p rate. If these numbers are correct, that would not reduce tax revenues, but everyone will be better off: the rich, the poor and the whole economy. How could anyone be against that?
tom jones
March 2nd, 2012 3:01pm Report this commentJohn Redwood made a brilliant point on Question Time last night. He said ditching the 50P is about getting more from the rich rather than less because more will actually pay tax.
john gerard
March 2nd, 2012 3:22pm Report this commentR2-D2,
The threshold could be raised to £12k, and paid for partly by what you say, but mostly by scrapping the ridiculous overseas aid budget. That's £13bn right there. Raising the threshold benefits everyone, but the lowest paid most of all. Making anyone who earns £12k or less pay income tax is tantamount to a criminal shakedown.
oldtimer
March 2nd, 2012 3:40pm Report this commentOn past budget form, Osborne will waffle and do nothing. He gives the impression of being a fag-end Chancellor, to borrow your apt phrase.
DavidDP
March 2nd, 2012 4:06pm Report this comment"DavidDP: You might just have some sort of point but for the fact that this tax is, in all probability, losing revenue and hence not taxing your fat cat target."
If you have to go into matters of marginal utility theory to explain why in practical terms you are actually attempting to maximise revenue, you've lost the argument with the voters.
The issue is, as always, the look of the thing. The right are going on about reducing the taxation burden on the rich, the left are colonising the reduction of the taxation burden on the poor. Labour have fluffed it somewhat by going on about VAT, but the LibDems have hit gold with the tax band increase. At a time when the Tories could have made the running on this, thereby smoothing the way for a reduction in the higher rate later on, the right have once again fluffed their strategic thinking by being in hock to ideology above all.
Shame.
Dimoto
March 2nd, 2012 4:43pm Report this commentSaddled with a bloated public sector, £1T of debt and still growing, and the rickety Euro-construct threatening to implode at any minute, it is rather difficult to be a "transformative Chancellor".
How about we wait until we get the debt pile under control, before getting "creative" ?
alastair harris
March 2nd, 2012 5:30pm Report this commenthope he does. It will take time for it to have the desired impact on growth and tax revenues - the longer he leaves it the more likely he is to be the wrong side of the argument at an election. His big mistake was not to do it straight away, but then he did have a yellow ticket to protect!
Kevin
March 2nd, 2012 5:50pm Report this commentThe politics of envy is indeed distasteful. Envy of savers, for example.
Nicholas
March 2nd, 2012 6:40pm Report this comment"There is more to good chancellorship than economics"
Yeah. If you are Gordon Brown there is subverting your own Prime Minister and Party, smearing opponents real or imagined, raiding pensions, screwing up the due diligent oversight of the finance industry, selling gold reserves at rock bottom prices and breaking mobile phones.
Have I missed anything?
John Millington
March 2nd, 2012 6:42pm Report this commentRaising the threshold and setting out a plan to reduce the 50p rate, perhaps over the course of the parliament, would send out the right message.
You point out that the very wealthy are very mobile today, but choose not to move because of family. Failure to attract wealthy foreigners is not the only problem. The future generations of entrepreneurs are also very mobile - they have no great commitment to remaining in the UK, and will go wherever the right opportunities and mentality exists. I think we underestimate the impact these high rates will have on that generation. Coupled with the general business sentiment that today's British youths are unemployable, it's going to be absolutely essential that those entrepreneurs choose to stay in the UK and start a business. It's wonderful that the coalition is making moves to position the UK as a competitive business centre with low corporation taxes and sensible deregulation, but that also has to be reflected in the ability to reap the rewards of the hard work that is put in to creating a business. The dispositions of those future entrepreneurs to starting a business in Britain will be soured if not a single party will declare themselves to be pro-success - it's especially important when public opinion stands against it.
Tom Pride
March 2nd, 2012 7:05pm Report this commentAs a interim measure just use the technique that Brown would have used. Keep the headline 50% rate for now, and, in the small print raise the starting threshold to £1 million and introduce a deferral mechanism for the extra 10% applied to incomes above that.
More importantly abolish the pernicious removal of the personal allowance and Brown’s farcical mendacious “it’s not income tax” 2p National Insurance surcharge which undermines the principle of National Insurance.
TomTom
March 3rd, 2012 1:22pm Report this commentWhy not simple stop collecting taxes and increase Quantitative Easing ?
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