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11 April 2011

Osborne aims to scrap the 50p rate by 2013

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

By George Eaton

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.

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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.