The 50p tax debate won’t be settled this year — but it might be escalated

More evidence this morning that the government won’t be dropping the 50p rate any time soon, in the form of an interview with Danny Alexander. ‘This is not the time to be looking to reduce the tax burden on the wealthy,’ he says to the Daily Telegraph’s James Kirkup and Robert Winnett.

This is a line that other ministers have deployed recently, and not just Lib Dems. And it suggests that the coalition is confident that HMRC’s forthcoming review of the rate will say that it does indeed raise revenue.

But the matter won’t end there. The IFS recently said of the HMRC review that, ‘tax records for just one year after the introduction of the 50p rate are unlikely to provide a robust estimate of how much revenue the 50p rate will raise’. So people will still question this tax rate’s efficacy, particularly as the IFS also reckon that it will raise less than the government is currently forecasting. By their account, it could conjure up ‘less than £1 billion in a year’ for the Exchequer, rather than the Treasury estimate of £2.7 billion.

So what’s a government to do? The crucial point that the IFS made on the 50p rate — as I blogged at the time — is that it sits within a wider tax system, which means that policies around it can, obviously, make a difference to how much money it raises. If various loopholes are tightened around the rich, then the likelier it is that they’ll have to pay the full whack. If those loopholes are loosened, well, the opposite.

Which is why the full exchange from the Alexander interview is worth noting:

‘He offers no such hope for anyone subjected to the 50p tax rate, however. Not only is the rate likely to stay in place (this is “not the time to be looking to reduce the tax burden on the wealthy”) but those on the highest wages are likely to find themselves subject to yet more scrutiny from HM Customs and Revenue as the Coalition turns the screw on evasion and avoidance. “People who dodge their taxes are morally equivalent to people who cheat the benefits system,” Mr Alexander declares.’

Typical Lib Dem policy, yes — and also a potential way to bumph up 50p revenues. But if the goverment starts trundling down that path, closing off each and every means of escape for the wealthy, then expect an escalation in current emnities. As the IFS put it, even if 50p does raise good amounts of money, it still may not be the ‘least harmful’ way of doing so. The bigger questions about which tax systems are best for growth will fester and persist.