Why it is right to cut the top rate of tax

The 50p tax rate for earnings over £150,000 p.a. has been a controversial subject since inception. It came into force in April 2010 (rather than April 2011 as planned) by the Labour Chancellor, Alistair Darling in the midst of a deep recession and in times of great uncertainty. Labour as the self-styled saviours of the “working class” promoted the concept of the “rich” paying more to support the “poor”, but it was evident this was a desperate attempt by an incumbent Government to generate more income.  Labours’ biggest voice, the unions argue the 50p rate should remain in principle – “Income inequalities in the UK are reaching levels not seen since the industrial revolution and it is our future economic success as well as our ability to build a fairer society that depends on closing them.”[1] I will therefore stay with this principle.

A ‘fair’ society must be fair for all and cannot discriminate on income inequalities, in isolation. To impose an unreasonable tax burden on richer members of society is to disregard their investment, innovation and entrepreneurship. In March 2012, a study conducted by HM Revenue & Customs concluded the 50p tax rise brought in hundreds of millions, not the £2.3bn anticipated. The study also found, as a result of the increased rate, high net worth individuals engaged in “tax planning” to reduce tax liabilities and waste resources on avoiding taxes – resources that could otherwise be put to productive use (the “Behavioural Response”)[2] . Thus, reducing taxable incomes to such an extent that the lost revenue from the reduced income exceeded the additional tax paid on the income that remained.

Closing down tax avoidance schemes and removing the incentive by tax cuts is a more effective tax policy allowing for entrepreneurship and success to stimulate growth as part of an overall strategy, with real growth to promote wealth and prosperity. Prosperity benefits society as a whole, for example allowing for an increased personal tax allowance (£7,475 increasing to £8,105) for members on a lower income, giving them an opportunity to advance and an aspiration to contribute to a sustainable economy for themselves and society. Together, Britain can deliver. After all, “when people earn money, it’s their money. Not the government’s money. Then the government takes some of it away in tax. So if we cut taxes, we’re not giving them money – we’re taking less of it away.”[3]

 

ATTIC RAHMAN

20 OCTOBER 2012

 

[1] http://union-news.co.uk/2012/03/pre-budget-special-why-scrapping-the-50p-tax-rate-is-wrong/

[2] http://www.hmrc.gov.uk/budget2012/excheq-income-tax-2042.pdf

[3] The Prime Minsters Speech, 10/10/2012, Conservative Party Conference