The Guardian reports that George Osborne is going to cut the top rate on income tax from 50% to 40%. Cue much rejoicing on the Tory side of politics, especially from those who are likely to benefit from this tax cut. Assuming it happens, of course. Fraser makes the best case there is for this policy but it is still a terrible idea even if you admit the logic of Fraser’s argument.
And I do agree with Fraser’s logic! The 50% rate of tax does not appear to increase government revenue. It is, in my view, wrong for the state to take 50% (or more) of any pound earned. Keeping the super-rich in Britain – the people Las Vegas casinos call “whales” – is, literally, a valuable objective. And this too, Fraser may be right to argue that it is better to lance this boil sooner rather than later. I appreciate that argument even if I don’t quite agree with it.
The 50% tax rate was, as Fraser says, a landmine laid by Gordon Brown. That does not, however, mean George Osborne was required to step upon it. And yet, if these reports are accurate, he has chosen to do so and, consequently, given Ed Miliband an open goal even he cannot miss unless he he really is a political Peter van Vossen (which he may be!).
This is not about revenue-raising. It is a question of politics and, as always, priorities. And questions of politics cannot be separated from perception. So how’s this for perception: the government is lowering the threshold beneath which families receive tax credits (and so raising tax on those families), stripping child benefit from single-earner families who are in the 40% bracket (another tax increase, effectively) and, doubtless, a good deal besides (including, probably, tax increases on drink and tobacco that hit the poor harder than the rich).
Couple all that with cutting the top rate of tax payable on earnings roughly six times the median wage and what do you have? A PR disaster is what you have. Doubtless there will be the traditional closing of loopholes and various other measures to ffset the cut in the 50p rate but none of that will make any headline the next day.
I am mystified why so many of my chums on the right think handing a £5,000 tax cut to someone earning £200,000 a year is such a good idea. This is not the 1980s. There were only two tax bands when Nigel Lawson lowered the top rate of tax from 60% to 40% and, anyway, the circumstances were scarcely comparable. I like my supply-side stuff as much as the next fellow but it is not obvious the same conditions apply today. By “not obvious” I mean that they do not.
Really, people, how do you think this looks? Do you really think the modest fiscal benefits of abolishing the 50p rate now, in these economic circumstances, trump the reputational damage this must do to the government? How do you explain this to a family on £35,000 (or less) a year? Sure, they will benefit from an increase in the tax free allowance but if Osborne cuts the 50% rate the budget headline is going to be that the top 1% of earners have been the biggest “winners” from the budget.
Meanwhile, people earning roughly 1.6 times median wages find part of their income taxed at 40%. 3.5 million people now find the state taking 40p of at least some of the pounds they earn. Sure, in many respects the top 15% are fortunate but the 40p rate now snares many people it was not designed to when Nigel Lawson introduced it.
George Osborne’s fans keep telling us that he’s a genius political strategist. Perhaps so, even if the evidence for this proposition remains almost anorexic. I’m sure abolishing the 50p rate will be considered splendid by people at risk of being vaught by it. I’m prepared to think it might – just might – have a usefully stimulating effect upon the economy. But the notion that this is an urgent matter – politically speaking – seem utterly daft.
It would, doubtless, be expensive to raise the 40p threshold. Nevertheless it should be done. A truly bold chancellor might even say that his aspiration, over the course of a parliament, is to lift the 40% band to twice median earnings. Granted, this would be tricky and expensive but it could not possibly be as politically expensive as handing a headline tax cut to people on six times median earnings.
As with an interventionist foreign policy, in budget terms you do what you can when you can but you must always be mindful of the optics. And the optics in this instance are bloody terrible. If this comes to pass then Osborne will obliterate the positive news of raising the personal allowance and be rewarded instead with a litany of headlines decrying the Same Old Tories Looking After Their Pals in the 1%. This will be so even if this cut is offset by other measures.
I mean, really, how difficult is it to appreciate that a headline-grabbing tax cut that does not benefit 99% of taxpayers might, politically, be a bad idea? Sure, it might be in some way a supply-side stimulus but, not unreasonably, most people will see it differently.
One last thought: given how awful this government’s communications business has been does anyone expect anything other than a PR debacle from this?
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