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Jill Kirby: Britain will pay the price if taxes penalise the better-off
THIS Thursday represents Tax Freedom Day 2009 – the date the average taxpayer would have to work to in order to pay off Gordon Brown's excesses as Chancellor and Prime Minister.
The gap between this and the amount of tax actually received is now the widest it has been for at least four decades, and possibly since the Second World War. There can be no doubt left that spending cuts or tax increases (or probably both) are needed to close the gap.
However, there can also be no doubt that such cuts or increases need to be carefully constructed – using any change to gain political mileage at the expense of the country as a whole will be another blow to an already fragile economy.
Yet in the 2009 Budget, Alistair Darling inflicted such a blow when he introduced a new top rate of income tax – 50p for all those earning over 150,000.
This looked like a highly political manoeuvre designed to wrong-foot the Conservative opposition. The Conservatives have refused to take the bait and so the political and economic case against the new rate has received little attention.
When speaking about how the decision to bring in the new tax rate was made, the Chancellor said: "There is no science behind it, it is just simply my judgment that I thought that figure was an appropriate figure."
He was wrong to apply no science or logic to his decision. He need only have turned to Adam Smith to see just why such a measure fails to meet the principles of good taxation.
Smith's principles of fairness, simplicity, certainty and efficiency provide an enduring test against which to assess the changes in the 2009 Budget.
The 2009 Budget isn't fair. The withdrawal of some personal allowances will lead to widely variable marginal rates, reaching 61.5 per cent for those earning between 100,000 and 112,000, while those earning more will face a lower rate.
Whether you believe in a flatter tax system or a more progressive one, it is clear that Alistair Darling's changes do not meet either objective. And with the top one per cent of earners already accounting for 24 per cent of all tax revenue, it makes little sense to incentivise such lucrative taxpayers to move abroad.
The changes to the tax system make it less simple. As a consequence of the Finance Bill 2009, there will be 16 different personal tax rates. When built upon an already highly complex tax system, the administrative costs will no doubt increase further as people try harder to avoid the higher rate. That the Chancellor
himself needs tax advice, as his expenses claim reveals, just shows how complex the system has become.
Recent changes, and the anticipation of future politically- motivated action, have made our system of taxation less certain.
The departure from a 30-year trend towards flatter taxation, accompanied by the Chancellor's hints of worse to come, will result in uncertainty about future taxation. Furthermore, the unintended consequences of the changes made in the 2009 Budget will mean some high earners approaching retirement may actually face a marginal tax rate of more than 100 per cent – an increase in pay will result in a lower take-home income!
Above all, the new rate is unlikely to raise revenue, due to its enormous inefficiency. Aggregating the microeconomic impact of the new rate and its associated changes shows that both participation and wealth effects will result in much lower revenue than the Chancellor claims. And even if the Treasury's optimistic assumptions are accepted, the estimated revenue of 2.4bn is nugatory in comparison with current government borrowing requirements of 175bn.
Adam Smith's principles show us that the new rate doesn't represent good taxation. And in today's globalised economy the harm will be much greater. The new rate will be the highest in the G8 and will therefore put the UK at the bottom of the international competitiveness league for high earners. The richest and most mobile members of the British population will have the greatest incentives to move abroad. These are the people most likely to provide the future growth and wealth creation this country desperately needs.
The negative impact of the 50p rate will thus far outweigh its ability to reduce the national debt. Moreover, it threatens
the UK's ability to rebuild enterprise and restore its battered economy.
In his Mansion House speech last week, the Chancellor hinted that he may take further steps to penalise the better-off.
It is time to recognise the long- term damage that this political manoeuvring will do to the British economy – and abolish it as quickly as possible.
Jill Kirby is director of the Centre for Policy Studies. She is the co-author, with Iain Griffiths, of a report published today called What's wrong with 50p? Unfair, complex, uncertain, inefficient and damaging. It is available at www.cps.org.uk
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