7 Sep 2011

Economists call for abolition of 50p tax rate

As 20 leading economists call on the Chancellor to scrap the 50p top rate of tax, one of them tells Channel 4 News Britain’s economy is likely to be damaged unless action is taken.

But Keith Pilbeam, professor of economics at City University London, conceded that it was difficult to prove that Britain lost more tax revenue than it gained from the 50p rate.

The economists, who include two former members of the Bank of England’s monetary policy committee, DeAnne Julius and Sushil Wadhwani, say the rate should be abolished “at the earliest opportunity”.

In a letter to the Financial Times, they say Chancellor George Osborne should introduce an “internationally competitive tax regime” to stimulate the economy.

They argue that the tax levy, introduced by Gordon Brown’s Labour government on incomes above £150,000, damages entrepreneurship.

‘Lasting damage to the UK economy’

“We are concerned that Britain’s 50p income tax rate is doing lasting damage to the UK economy. It gives the UK one of the highest personal tax regimes in the industrialised world, making it less competitive internationally and making us less attractive as a destination for both foreign investment and talented workers.

“It punishes wealth creation by imposing on entrepreneurs and business people a marginal tax rate in excess of 50 per cent once national insurance contributions are added in. This is particularly damaging when the UK needs to create new businesses in new industries.”

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The authors of the letter say the 50p rate applies to 1 per cent of taxpayers who contribute 24 per cent of all income tax revenue.

“We call on the Government to drop the 50p tax at the earliest opportunity as part of a package of measures to stimulate growth. Only by returning to an internationally competitive tax regime will Britain enjoy long-term sustainable economic growth.”

Temporary measure

Prime Minister David Cameron’s official spokesman said: “As the Chancellor said at the time of the Budget, the 50p rate is a temporary measure. He has asked Revenue and Customs to conduct some analysis on the amount of money being raised by the 50p rate. That analysis is still ongoing.”

Prof Pilbeam, who is a member of the Labour party, told Channel 4 News he was not defending wealthy bankers, but he believed high tax rates were bad for Britain.

"It is about what is impinging on entrepreneurs in this country and sending a bad signal to the rest of the world. It is motivated by a belief that it's sending the wrong signal and some people may decide not to come to Britain."

Britain's share of inward investment had fallen, but it was difficult to prove conclusively that the country lost more in tax revenue than it gained from the 50p rate.

"You can do all the economic modelling you want, but you won't have the figures until the tax returns are done. I am not trying to say I can empirically prove it. The question is whether it raises more tax for the country. It is actually quite difficult to prove that empirically."

Despite this, there was still a real danger that tax revenues could fall because high-earning business people could decide to move abroad. "If an entrepreneur earning £300,000 a year decides to leave, you don't just lose his tax, you lose his employees' tax."

Germany, France and the US all have lower top rates of tax. But the Conservatives’ Liberal Democrat coalition partners say scrapping the 50p rate is not a priority in a time of austerity.

Emergency measure

It was introduced as an emergency measure to raise revenue in former chancellor Alistair Darling’s final budget in 2010 and was expected to contribute £3.1bn this year.

Ms Julius told BBC Radio 4’s Today programme that many hedge funds had already moved from Britain to Switzerland. “Politically speaking it is going to be difficult to abolish whenever it is done. What we are trying to do is say this is not just a matter of politics, the country really does need to increase its growth strategy and this is a place where we are just shooting ourselves in the foot.”

Shadow Chancellor Ed Balls said: “Millions of struggling families and pensioners on middle and low incomes will wonder why the only tax rise or spending cut George Osborne is willing to reconsider is the top rate of tax for the very richest.”

It would be better for the country if the government temporarily reversed its VAT rise, which would save families £450 a year, said Mr Balls.