Matthew Sinclair

50p tax rate will discourage entrepreneurship

50p tax rate will discourage entrepreneurship
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At the TaxPayers' Alliance, we've released a new report, Tax and Entrepreneurship, today looking at how the tax system affects the incentives for entrepreneurs.  The report sets out how the new 50p top rate will mean fewer new businesses and, as a result, fewer jobs.

In order to make it worth a potential entrepreneur's while to bear the risks that come with starting a new venture, instead of sticking with an existing organisation, there needs to be a big reward if things go well.

Often, the pay off will be more than the entrepreneur needs and the real reward will be money that can be saved, invested in a company and then left to their children.  That's why Theo Paphitis, on the BBC's Dragon's Den, refers to the money he invests as his children's inheritance. Unfortunately, saving and then passing on income means that it gets taxed repeatedly.

That means, even under the current 40p top rate, entrepreneurs face a total top marginal tax rate of 90%.  With the 50p rate in place that will rise to 92%, which means that 20% of what people are left with now is going to be taken by the new rate.  There will clearly be potential entrepreneurs who, looking at that kind of tax burden if their company succeeds, decide it isn't worth it.  That will have significant consequences for those currently out of work thanks to the recession as new firms create the vast majority of new jobs.

Our report shows that it won't just be the rich who suffer thanks to the new 50p rate.  Independent forecasters have predicted that it could well lose the Government revenue, and certainly isn't going to make a significant contribution to addressing the fiscal crisis.  It was a crass political stunt, designed not to address the crisis in the public finances but the headlines the day after the Budget, and should be abandoned.

Matthew Sinclair is Research Director at the Taxpayers' Alliance