Rory Meakin: Let’s have facts, not populism, over the 50p tax rate

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THE letter-writing economists are right. The 50p rate of income tax is doing lasting damage to Britain’s economy and must be abolished as soon as possible.

It’s a harmful, unfair gimmick. Saying this may be seen as cheer leading for the rich. But, as the TaxPayers’ Alliance has said previously, the tax system includes lots of measures which penalise those on low incomes.

Tax credits and much of the welfare system act as a huge disincentive for people who want to work harder and improve their lives. VAT falls on the kind of expenditure that makes up a bigger proportion of the spending in lower income families than in those of the better off.

Most regressive of all are the nanny-state duties, the so-called “sin taxes” on flights, fuel, alcohol and tobacco. If a pack of 20 cigarettes were priced at £4.64, every penny would go to the Treasury in three separate taxes: a tax of over 15p per cigarette, VAT at 20 per cent plus an additional 16.5 per cent tax just for cigarettes.

These taxes hit low-income smokers very hard in the process and force many others into the black market. And before people even start to spend their money, the Government starts to take a cut in income tax from people who earn just £143 a week.

So there’s plenty that both could and should be done to stop the tax system from causing as much pain to those on low incomes as it does. But none of that changes the facts that the 50p rate of income tax, paid for by those on high incomes, is causing lasting economic damage and is unfair.

Many of those earning over £150,000 will stay in the UK and work just as hard as they did before the 50p rate was introduced, planning their tax affairs no differently.

But plenty will change one or more of those things, and it’s the effect of that which means the tax loses about the same amount of revenue for the Treasury as it gains.

With so much more money to lose by not planning their tax affairs efficiently, some high earners will decide that hiring a clever accountant to save them money is now worth the effort.

Some may have been wondering whether they should have been working as hard as they did when they paid income tax at 40 per cent. Perhaps they have family they felt they were neglecting, or perhaps it was a hobby or something else they wanted to make more time for.

The balance must have tipped for some of these people when the rate went up and prompted them to work less hard and fewer hours. Others still have simply left the country, moving to places like Hong Kong or Switzerland where tax rates are much lower. To those that say “fine, let them leave”: many of those affected by the 50p rate are employers too. We must remember that if they leave then jobs may be lost. All because politicians would rather pander to populism than explain the facts to the electorate.

The Government should be concerned with the wider economy as well as just its own revenues, too. Former Chancellor of the Exchequer Alastair Darling has said that the 50p rate must “stay in place until we are through this crisis”.

But the unemployed who are struggling to find work because the economy is not strong enough to generate as many jobs as it should be should not have to wait for the wounded, spluttering economy to repair itself before the Government pulls its finger out and scraps harmful policies.

It is because of damaging policies like the 50p rate that we’re still in a crisis.

The rate is also unfair for two reasons. First, because it simply can’t be right for the Government to take such a large proportion of someone’s income, no matter how well off. With Employee’s National Insurance at two per cent and Employer’s National Insurance at 13.8 per cent on top of the 50 per cent income tax, the true rate works out to almost 58 per cent.

And before they get to buy things with that 42 per cent of their own money that they’re allow to keep, VAT and excise duties take even more. Second, because any tax that doesn’t raise money for the Treasury is simply vindictive, there only to punish those liable.

This may be an exciting political gimmick for some, but it can’t play any part of a sensible, fair system of public finances. People may make different judgements about how far the tax system should go in funding government services, but we should all agree that tax should be a “necessary evil” to pay for those services, not a way to hurt people financially for its own sake.