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10 March 2014

Tory group calls for Osborne to embrace the 45p tax rate – he should listen

Renewal's call for the 45p tax threshold to be reduced to £62,000 to fund the abolition of the 40p rate is smart politics.

By George Eaton

There are nine days to go until the Budget, so Conservative groups and think-tanks are busy sending their wishlists to Number 11. By far the most striking proposal comes from Renewal, the organisation founded by David Skelton to widen the party’s appeal among northern, working class and ethnic minority voters. In an article in today’s Telegraph, Skelton calls for the abolition of the 40p income tax rate, the source of much Tory complaint. As he notes, owing to successive reductions in the tax threshold (which currently stands at £41,350, down from £43,875 in 2010), the number of people paying the higher rate has risen to a record high of 4.4m (up from 3m in 2010). He writes: “More and more people on middle incomes have been dragged into paying the 40 per cent rate of tax over the past decade. That includes teachers, nurses, bricklayers, police officers and Tube drivers. These are not people who should be in the higher rate tax bracket but are because the threshold at which it is paid has been repeatedly frozen.” (Although it is worth remembering that only 14 per cent of workers earn enough to pay the rate.) 

But rather than proposing to fund its abolition through greater spending cuts, as most Tories would, Skelton calls for the move to be funded by reducing the threshold for the 45p rate from £150,000 to £62,000. This, he says, would ensure that the measure is fiscally neutral, and he goes on to make a principled case for progressive taxation: 

We calculate that a person would have to earn more than £85,000 to be worse off with this proposal and those earning above that threshold would bear the burden of the change. Someone on £120,000 would be about £830 worse off and anyone earning £150,000 or more would be £2,400 worse off. As ever in taxation, someone has to pay and it is those who are very well off who will do so, meaning that the proposal is fiscally neutral.

When he was defending the 1909 “People’s Budget”, David Lloyd George said that “we are placing burdens on the broadest shoulders”. Under our proposals, the very richest would pay a little more, while the overwhelming majority of working people would benefit, some of them considerably.

Skelton’s proposal reflects Renewal’s concern with improving the Tories’ standing among blue collar voters (“a Workers’ Budget from a Workers’ Party”), which includes taxing the well-off more heavily in order to improve the living standards of the majority. Robert Halfon, the MP for Harlow, and the group’s parliamentary leader, has previously called for the revenue from the 45p rate to be ring-fenced in order to fund the restoration of the 10p tax band (having opposed the decision to abolish the 50p rate) and for the introduction of a windfall tax on the energy companies. 

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All of this is smart politics (voters overwhelmingly support progressive taxation) and good policy, but also entirely at odds with the current Conservative consensus (Skelton’s article has earned him a sharp rebuke from the Telegraph’s Benedict Brogan). Rather than supporting the 45p rate as a just measure, not least at a time of austerity, senior Tories continue to give the impression of wanting to scrap it at the first opportunity. Asked by the Spectator last year whether he would like to reduce the top rate to 40p, David Cameron said: “I will leave tax as a matter for the Chancellor. I am a low-tax Conservative.” And the Chancellor? He has similarly refused to rule out cutting the rate again. Meanwhile, Boris Johnson, Osborne’s main contender for the Conservative throne, has suggested that the Tories should “brood” on reducing it to 3op. In the absence of a dramatic ideological volte-face, there is no prospect of any of them taking up Renewal’s plan. But if the Tories are to ever shed their reputation as the “party of the rich”, and start to dream of winning a majority again, it is the kind of imaginative thinking they will need to embrace.