Opposition to the 50p tax rate should be based on evidence, not opinion

(c) joncandy

Andrew Rodgers

Is it now simply a matter of time until the 50p tax rate is abolished? It seems likely. Not just because of ideological opposition from the Tories, but because Ed Miliband has chosen not to restate his position during the leadership campaign: that he viewed the 50p tax rate as a permanent measure. His silence on this last week is probably a tacit admission that he would compromise on this issue when in power if the economy has recovered.

The simple fact that a letter in the Financial Times from 20 economists, calling for an end to the top rate of tax, was able to set the news agenda to the extent that it did last week, is quite staggering.  But the fact that the letter contained no actual evidence in support of their assertions and was still able to do so is worrying. 

In reality, we do not know how much money the 50p tax rate will raise. The Treasury estimates it will bring in an extra £2.4bn a year in income tax. Osborne is sceptical, however, and believes that an exodus of wealth and talent will lead to lower-income tax receipts in the long run. Early indications are that the number of people in the top tax bracket has remained the same, and that income tax revenues are up nearly 18%. But the fact remains it is too soon to tell whether the Treasury estimates are accurate, and even if the evidence supports the view that the measure is successful, Osborne will still be able to argue that the tax will retard economic growth in the long run. It will be impossible to prove or disprove this to the satisfaction of all.

As is often the case with economics, we do not know for sure, and it comes down to a combination of guesswork and ideology. It is true, at some point, the marginal tax rate will be so high as to act as a disincentive to work, and this will result in government taking less revenue overall. There must exist a tax rate which maximises government revenues somewhere between 0% and 100%, the problem again is there are numerous studies and no satisfactory consensus. It hardly seems likely though that a 50% rate is so high, the mega-rich simply wouldn’t bother getting out of bed – it is quite modest in historical terms. It is worth noting that money is not the only motivation people have to achieve at work.

The most common argument is that a higher marginal tax rate will lead to an exodus of talent, wealth and entrepreneurialism, a return to the ‘brain drain’ of the 1970s. There is no evidence this is happening, and it seems less worrying when you look a bit more closely at which people actually qualify for this tax. The vast majority of brilliant scientists, academics and entrepreneurs are entirely unaffected (and the later group would be more concerned with capital gains tax in any case). The vast majority of the top 1% who pay the tax either work in the financial sector, or have risen through the ranks of large corporations

How much damage will there be to the wider economy if the financial sector is unable to attract the best and brightest?  Many of the people in this pay bracket create ‘wealth’ by moving other people’s money around. This is not exactly wealth creation as Adam Smith would see it. Creating money out of nothing does not do much good in the long run, as eventually the bubble bursts. If a side-effect of the 50p rate is a smaller financial sector, this would be no bad thing for the health of our economy.

What about our corporations, how will they fare without world-beating leaders? Well, for every inspired CEO, there is probably someone slightly lower in the pecking order who is just as good, and is happy to stay in the UK. When looking at the global success stories of private sector growth of recent years, economists tend not to point to the talent at the top as the main explanation. There are a huge number of factors – infrastructure, the local market, a skilled workforce – that have a far greater impact on the life of a business.

There are some people who do not fit into either of the two above categories, however, who are ultra-mobile and wealthy. Perhaps the loss of a small number of talented individuals is not such a drain to the economy, but what if the mega-rich relocate their wealth elsewhere? This already happens, the UK cannot compete with a number of European countries. There is a great deal more that could be done to minimise tax avoidance, however, particularly at the European level. It comes back to the evidence – there is no cause to think that this is happening at a level which will make the tax self-defeating.

Public pressure will stay Osborne’s hand for now. But there needs to be a concerted and coherent counter argument from the Left if we are to have a tax system where everyone pays their fair share. There is scant historical evidence that lower marginal tax rates affect economic growth, which is really what it comes down to. Globally, growth has slowed down as inequalities have increased. Even if the tax does not bring in much money, or results in a small net loss, it could still be worth it. How is it possible to make this argument?  There is quantitative evidence that more equal societies provide higher levels of health and well-being for 99% of their citizens. This is something which has sadly been completely missing from the mainstream discourse.

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