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5 August 2011

Osborne plans cut to 50p tax rate

Treasury projections suggest the rate generates "little revenue" -- but cutting tax for the wealthy

By Samira Shackle

David Cameron and George Osborne are discussing plans to cut the top rate of income tax from 50p to 45p.

Just days after Danny Alexander, the chief secretary to the Treasury, declared that anyone who wanted to cut the 50p tax rate was in “cloud cuckoo land”, it has emerged that the rate could be cut as soon as next April’s Budget.

The 50p rate, introduced by Labour in 2009, for those earning more than £150,000 a year, has been a political headache for the Tories. They have wanted to reverse it since coming to power, and now Treasury projections suggest that the economic returns may be only modest. According to these estimates, cutting the tax rate to 45p would still generate 70 per cent of the revenue earned by the 50p rate.

This analysis suggests that the extra revenue generated between the 45p and 50p bands could be as little as £750m, because people paying 50p are more likely to retire earlier, emigrate, or invest in tax avoidance schemes.

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The government stresses that it will not make any decision until it has the final figures for the amount actually raised. However, several newspapers today quote senior sources echoing earlier comments by Osborne: that it is a matter of when, not if, the rate is cut. It is expected to come in 2012 or 2013, and to be dressed up as part of a “tax simplification” package.

Given that public sector jobs and services are facing deep cuts, it would be a controversial move. The rate affects only 300,000 people and polls suggest that it is popular with the public. While £750m may be a small amount in terms of government borrowing or revenue, it is not a totally meaningless figure. It is enough to prevent cuts to the Train to Gain programme, to grants to local authorities for school transport, or to road improvement. Campaigners opposing a tax cut would do well to highlight these direct comparisons.

“Anyone who thinks we’re going to shift our priority to reducing the tax burden for the wealthiest has got another think coming,” said Alexander on Sunday. But despite these tough words, senior Lib Dems have indicated the cut may be acceptable to them if cuts to income tax for the rich are offset by other measures targeting them. Vince Cable, the Business Secretary, said yesterday that the tax “would need to be replaced with something else — primarily something associated with wealth or high-value property”.

Osborne and Cameron believe that cutting the tax rate will boost the economy. But a more effective way to do this would be to reverse their own hike in VAT. This would put money back in the pockets of everyone in the country, rather than just the 300,000 richest people.

Osborne wants to make Britain a Thatcherite, ultra-low tax economy, but when the public finances are in such a poor state, a tax cut for the wealthy does not send the right message. From right to left, there are different views about the inherent value of high taxes. But as the vast majority of the country faces prolonged financial hardship, it is simply bad politics to suggest cutting tax for those most able to pay it.