The top rate of tax (50% tax rate on earnings over £150,000) has been a particularly controversial source of debate amongst the coalition and with the 2012 budget being drawn up soon, it has never been more important. Historically, the Conservative Party has adopted a low tax policy but they have been reluctant to push on to abolish it. Why? Simply because it would be too much of a high risk move with too many variables to consider.
With the economy grinding to a halt and a double-dip recession threatening, the need for an expansionary government policy of some kind is at an all time high. Many businesses have called for the top rate to be scrapped saying that it is “reducing government income and damaging the economy” (see the Laffer curve theory for further understanding of this concept). 20 high profile economists have also criticised the tax rate saying that it is doing “lasting damage to the economy” and should be axed “at the earliest opportunity to boost growth”. The 20 experts include two former members of the Bank of England’s Monetary Policy Committee, DeAnne Julius and Sushil Wadhwani. The report, promoted by the PR firm Westbourne and funded by concerned businesses further states that the rate is “less competitive internationally, and making us less attractive as a destination for both foreign investment and talented workers”. As a response, George Osborne said that he does not see the 50% rate as a lasting tax rate for Britain and agreed that “it’s very uncompetitive internationally.”
However, the political consequences for the conservatives of cutting the tax rate have the potential to be huge. Robert Halfon, conservative MP for Harlow believes that, politically, it would damage the popularity of the conservative party and deter many of the average voters away from the conservatives and towards labour. He says that abolishing the top rate of tax “would allow our opponents to re-characterise the Conservatives, as being the party of the rich – for the few, not the many”. A tax cut for the rich would surely cause uproar from average earners.
Ongoing pressure from the Liberal Democrats has added a new source of concern for the Conservative party as they must agree on a compromise concerning the top rate in order to vote through any legislation. Last week, Business Secretary Vince Cable told Radio 4 that his party is “not ideologically wedded” to the top rate but he believes that the rich should pay their share in the tough times that we are in. The Liberal Democrat plan for the economy includes imposing a “mansion tax” on homes exceeding £2 million to pay for the Liberal Democrats’ long term goal of lifting many low income earnings out of paying tax (Raising the threshold at which people start paying income tax to £10,000). Shadow chancellor Ed balls said that the Labour party would support the introduction of the mansion tax.
London mayor Boris Johnson believes that cracking down on stamp duty loopholes on mansions would be a more efficient solution for the government and claims that the government could save “billions of pounds” just by addressing tax evasion. A report by the Centre of Policy Studies claimed 1 per cent tax on properties worth more than £2million would raise only £1 billion.
With the budget announcement on the 21st of March looming ever closer, it’s crunch time for the coalition. Scrapping the top rate would politically hurt the conservative party; keeping it would incur criticisms from economists and businesses. Recent coalition negotiations suggest that the 50p tax rate will be axed. It’s now down to Chancellor George Osborne as to which option he will take.