Osborne aims to scrap the 50p rate by 2013

Chancellor pencils in 2013 as the earliest possible opportunity to remove the top rate.

George Osborne made his ambition to scrap the 50p tax rate clear in last month's Budget. "[T]he 50 pence tax rate would do lasting damage to our economy if it were to become permanent. That is why I regard it as a temporary measure," he said.

Now, for the first time, we learn that the Chancellor has "pencilled in" 2013 as the earliest possible opportunity to remove the top rate. It's no coincidence that this is the same year that the public-sector pay freeze ends. Osborne, a keen political strategist, won't want to hand a tax cut to the richest 1 per cent until he can provide relief elsewhere. But I'd still expect Labour to contrast the "temporary" 50p rate with the "permanent" VAT rise.

HM Revenue and Customs is about to begin its review of how much money the new rate brings in and, as David Laws revealed last month in the Financial Times, the Treasury believes that the bulk of the revenue expected from the 50p rate is "lost in avoidance". I'd be surprised if the top rate raises £2.4bn a year (the initial Treasury forecast) but I'd still expect the Chancellor to benefit.

Those who claim that the new rate will bring in no revenue are fond of pointing out that Treasury receipts increased after Nigel Lawson reduced the top rate from 60 per cent to 40 per cent in 1988. But this had less to do with the Laffer curve than the fact that fiscal drag (when earnings rise faster than tax thresholds) meant high numbers of people were sucked into the 40p band, more than compensating for the removal of the 60p band.

In the meantime, Labour needs to establish a fixed position on the 50p rate. Since Ed Miliband became leader, he has described the top rate as "permanent", although Alan Johnson's tenure as shadow chancellor brought a greater emphasis on merely retaining it "for this parliament". At the same time, Ed Balls has suggested that reducing the starting threshold from £150,000 to £100,000 is still an option.

Then again, the shadow chancellor has also warned against turning "rates into principles" and has emphasised that "the principle is the tax system should be progressive". This leaves open the possibilty of Labour supporting the removal of the 50p rate in favour of a range of new property taxes.

As Balls appeared to suggest, in the event that the 50p rate raises little or no revenue, his party may need a plan B.

George Eaton is political editor of the New Statesman.

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What is the EU customs union and will Brexit make us leave?

International trade secretary Liam Fox's job makes more sense if we leave the customs union. 

Brexiteers and Remoaners alike have spent the winter months talking of leaving the "customs union", and how this should be weighed up against the benefits of controlling immigration. But what does it actually mean, and how is it different from the EU single market?

Imagine a medieval town, with a busy marketplace where traders are buying and selling wares. Now imagine that the town is also protected by a city wall, with guards ready to slap charges on any outside traders who want to come in. That's how the customs union works.  

In essence, a customs union is an agreement between countries not to impose tariffs on imports from within the club, and at the same time impose common tariffs on goods coming in from outsiders. In other words, the countries decide to trade collectively with each other, and bargain collectively with everyone else. 

The EU isn't the only customs union, or even the first in Europe. In the 19th century, German-speaking states organised the Zollverein, or German Customs Union, which in turn paved the way for the unification of Germany. Other customs unions today include the Eurasian Economic Union of central Asian states and Russia. The EU also has a customs union with Turkey.

What is special about the EU customs union is the level of co-operation, with member states sharing commercial policies, and the size. So how would leaving it affect the UK post-Brexit?

The EU customs union in practice

The EU, acting on behalf of the UK and other member states, has negotiated trade deals with countries around the world which take years to complete. The EU is still mired in talks to try to pull off the controversial Transatlantic Trade and Investment Partnership (TTIP) with the US, and a similar EU-Japan trade deal. These two deals alone would cover a third of all EU trade.

The point of these deals is to make it easier for the EU's exporters to sell abroad, keep imports relatively cheap and at the same time protect the member states' own businesses and consumers as much as possible. 

The rules of the customs union require member states to let the EU negotiate on their behalf, rather than trying to cut their own deals. In theory, if the UK walks away from the customs union, we walk away from all these trade deals, but we also get a chance to strike our own. 

What are the UK's options?

The UK could perhaps come to an agreement with the EU where it continues to remain inside the customs union. But some analysts believe that door has already shut. 

One of Theresa May’s first acts as Prime Minister was to appoint Liam Fox, the Brexiteer, as the secretary of state for international trade. Why would she appoint him, so the logic goes, if there were no international trade deals to talk about? And Fox can only do this if the UK is outside the customs union. 

(Conversely, former Lib Dem leader Nick Clegg argues May will realise the customs union is too valuable and Fox will be gone within two years).

Fox has himself said the UK should leave the customs union but later seemed to backtrack, saying it is "important to have continuity in trade".

If the UK does leave the customs union, it will have the freedom to negotiate, but will it fare better or worse than the EU bloc?

On the one hand, the UK, as a single voice, can make speedy decisions, whereas the EU has a lengthy consultative process (the Belgian region of Wallonia recently blocked the entire EU-Canada trade deal). Incoming US President Donald Trump has already said he will try to come to a deal quickly

On the other, the UK economy is far smaller, and trade negotiators may discover they have far less leverage acting alone. 

Unintended consequences

There is also the question of the UK’s membership of the World Trade Organisation, which is currently governed by its membership of the customs union. According to the Institute for Government: “Many countries will want to be clear about the UK’s membership of the WTO before they open negotiations.”

And then there is the question of policing trade outside of the customs union. For example, if it was significantly cheaper to import goods from China into Ireland, a customs union member, than Northern Ireland, a smuggling network might emerge.

 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.