The 50p tax rate continues to cause tension within government, as Downing Street made it clear last night that there would be no decision on scrapping the rate this year.
A spokesman for the Prime Minister said it would be difficult to make a decision before 2012, when we will have the results of a review into the income tax rate for those earning over £150,000. Realistically, it would not be politically expedient to make a decision before 2013, when the public sector pay freeze ends. The tax is too charged with political symbolism about fairness to be scrapped without being seen to provide relief elsewhere, too.
Although Osborne has expressed doubt over how much money the tax raises, official figures released by the Treasury show that the 50p rate would raise £12.6bn over the next five years, a calculation which incorporates the chance that top earners might leave the country to avoid the tax. This would mean that by 2015-16, the 50p rate would raise £3.2bn more than if the top rate was 40p. It provides ammunition with those who disagree with a letter sent by 20 economist to the Financial Times, calling for the rate to be scrapped early.
Yet debate around the controversial tax rate rolls on. In an interview with the New Statesman‘s political correspondent, Rafael Behr, Danny Alexander makes clear his priorities on taxation. Here is an extract from the interview (available in this week’s magazine, currently on the newsstands):
From the Treasury perspective, the main Lib Dem contribution to government has been the plan to raise the income-tax threshold to £10,000 by the end of the parliament. Alexander is very attached to this policy as a way of compensating people on low incomes for the cuts. “I think it’s a direction that we will want to push further,” he says. How much further? “I don’t see why, in the next parliament, we shouldn’t be trying to get to a situation where people in a full-time job on the minimum wage are paying no income tax at all. That, to me, is a higher priority than reducing the overall tax burden on the wealthy.” I take this to mean that he rejects the aim, supported by many Conservatives and endorsed by a group of 20 economists in a public letter to the Financial Times, of abandoning the 50p top rate of income tax. “At a time when the whole country is facing serious financial challenges, the priority needs to be people on low and middle incomes.”
Nick Clegg and Vince Cable have both made it clear that they have no ideological objection to scrapping the tax, as long as it is replaced by another measure to tax the rich. One measure they are looking at is a property tax. Tim Farron, the president of the Liberal Democrats, was more unequivocal:
What an outrage, in tough times like this, if the government was to give a tax cut to those who earn more than £150,000 a year and not give any more to those people who are struggling to get by, many of whom are paying the price for the profligacy and recklessness of very wealthy people that got us into this mess in the first place.
Meanwhile, Conservatives continue to be frustrated with the fact that the tax rate has not been dropped. Eric Pickles, the Communities Secretary, conceded that the tax could be dropped only “when the time is right”, but added:
I think there is a strong and reasonable case to say, ‘Come on, this is not actually contributing very much’. On balance, it’s probably doing more damage than it’s doing good.
This latest debate was triggered after 20 economists wrote to the FT to urge George Osborne to abandon the top rate in order to stimulate the faltering economy. As we at the Staggers have argued repeatedly, reversing their hike in VAT would do far more to stimulate the economy.