The 50p tax rate has been a persistent political headache for the Tories — and now it looks as if it is not going anywhere until 2015.
David Cameron and George Osborne have always maintained that the top rate of tax, introduced by Gordon Brown in 2010, was a temporary measure. It was suggested in August that it could be cut to 45p as soon as this year or next.
However, the Telegraph today reports that the Prime Minister and Chancellor have concluded that cutting the tax rate is politically impossible in the near future, as they wish to avoid looking like they are pandering to the rich.
Asked about the 50p tax rate on the Andrew Marr Show yesterday, Cameron said:
When you’re taking the country through difficult times and difficult decisions, you’ve got to take the country with you. That means permanently trying to make the argument that what you’re doing is fair and seen to be fair.
Given that the public sector pay freeze has effectively been extended until 2015, it would be bad politics to remove the 50p rate. Osborne actually said in his 2009 Conservative conference speech that it would be “grossly unfair” to scrap the top rate of tax while public sector pay remained frozen. Polls have shown that the public broadly support the 50p rate.
On top of the issue of presentation is, simply, the economics. HMRC is currently preparing a report on the top tax rate. While earlier reports suggested that it would find only modest economic returns, it is now expected to show a “surge” in revenues totalling hundreds of millions of pounds in the first year alone. This is despite Osborne’s declaration in the last Budget that high rates of personal tax “crush enterprise, undermine aspiration and often undermine tax revenues as people avoid them”.
The 50p rate has been a sore point in the coalition, with Liberal Democrats arguing that it must not be removed unless it is replaced by another tax on wealth. Danny Alexander memorably declared that anyone who wanted to scrap the tax was in “cloud cuckoo land”, although he was soon contradicted. After Nick Clegg’s concession last week that the mansion tax is unlikely to happen, my colleague George Eaton noted:
The corollary of this is that the 50p tax rate is likely to remain for the duration of the parliament. The Lib Dems will not accept the abolition of the top rate unless it is replaced with some kind of wealth tax.
Yet backbench Tories remain opposed to the tax. In the Budget in March, Osborne is expected to indicate that the decision to retain the 50p rate until 2015 is still under review.
Change may be off the table for the moment, but the pressure from backbenchers on Conservative top command will remain.