The 40p Tax Rate is Much More Important than the 50p Rate

Clarissa Tan made a number of fine points about the utility of the 50p rate of income tax yesterday. Tim Montgomerie makes some more at ConservativeHome today under the headline “Osborne is warned that Britain will lose its high earners if he doesn’t abolish 50p tax band.” Maybe, but he might lose the next election if he does.

This is not the 1980s. It was possible then to persuade middle-income voters that tax rates north of 80% were foolish, punitive and counter-productive. Making a comparable case for abolishing the 50p rate is a much more difficult prospect. If these were happy times matters might be different but they are not and there’s no point trying to pretend they are.

The CEBR, the latest think tank to address this issue, suggests that “Combined with increased labour and capital mobility, this means the revenue maximising top rate of income tax is likely to be less than 40 per cent.” Emphasis added but that “likely” is a useful reminder that these problems are measured by estimates and a good deal of guesswork.

But let us suppose this is not the case and the CEBR is correct. Does anyone think the Chancellor can possibly reduce the top rate of tax to 39%? Lower taxes are a noble notion but were he to cut the top rate of tax in the way the CEBR suggests one wonders quite what he’d have to do for middle and lower-income earners to balance his budget in a political sense.

Allister Heath is also right to point out the truth that, in terms of income tax, the top 1% of earners now pay a huge percentage of the overall tax take. Nevertheless, while it is all very well and good for the city and those associated with it to argue that the 50p tax paid by the richest 300,000 people in the country is not very efficient and could possibly “drive” some people away one cannot avoid noticing that the people keenest on abolishing the 50p tax rate rarely mention politics. Perhaps that’s because doing so right now would be lousy politics and the kind of thing Sir Humphrey would call “brave”. Does anyone really think handing a massive tax cut to whining City millionaires is good politics?

It might be the right thing to do in a number-crunching sense but it’s the wrong thing to do politically-speaking. As Tim Montgomerie says:

If 50p is ever to be abolished it will need to be part of a wide-ranging tax reform package that is seen by the public to be fair. When that happens it is vital that Conservatives are seen to be in the lead and that the Liberal Democrats cannot claim to have stood up for ordinary workers against the ‘nasty Tories and their friends in the City’. It is a great shame that the increase in the income tax threshold within the Coalition Agreement came from the Lib Dems. Many Tories (eg Edward Leigh on ConservativeHome) have long believed it should have been in our manifesto. In the next restructuring of the tax system the aim should be to further promote social mobility and social justice and we must set the pace and look like we are setting the pace.

Quite. If any Conservative thinks this can be achieved by scrapping the 50p rate without there being bigger, attractive measures put in place for the many, not the few then they’re delusional. Noen of this means Britain doesn’t need to look at the way the tax system is built, but the Chancellor cannot possibly be seen to be slashing taxes for his rich chums while ignoring the lower orders who toil and toil and wonder why nothing seems to get even a little easier.

Number-crunching is often about what it optimal; politics is about what is possible. Moving people out of the 40% rate doesn’t receive as much attention as the 50% rate on the richest taxpayers but, politically, it’s the bigger issue. So too, of course, is assisting the people who will never be fortunate enough to be in the upper tax brackets.