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The time for Osborne to shed Brown’s 50p rate is now

2 March 2012

12:38 PM

2 March 2012

12:38 PM

Will George Osborne have a better chance to abolish the 50p tax than this month’s
Budget? It would be unpopular, so it’s the kind of move he’d be unlikely to make before an election. The Lib Dems have something they want to trade: permission to raise the tax
threshold towards £10,000. And two recent reports, by the CEBR (pdf) and IFS (pdf), have reinforced that this tax is losing money. At the heart of the 50p tax is a deeper question: is Osborne a transformative Chancellor
who will change the terms of debate? Or is he doomed to operate within parameters set by Gordon Brown? I look at this in my Telegraph column today. Here are my main points:
 
1. The super taxpayers… Even Brown knew that Britain is highly dependent on a tiny number of very rich (and very mobile) people. As The Spectator’s leader revealed last month, the richest 1 per cent earn 13 per cent of salaries paid but contribute 28 per cent of income tax
collected. This is what you might call a ‘fair share’:
 

 
2. …a lot of them immigrants. It was Brown’s greed for tax revenue that led him to leave the top rate untouched: he knew that, in our globalised world, countries
compete for people. For a while, the walkway to Heathrow Airport had an HSBC campaign listing the top rate of tax in various cities — a nod to the fact that passengers had a choice. In this
flat world of ours, people and their businesses can be based anywhere. This was true in the 1980s: the first Sunday Times Rich List (1989) showed that just 11 of the top 100 were immigrants. But in
1988 Nigel Lawson lowered the top rate of tax from 60 per cent to 40 per cent and Britain became a magnet for the world’s talent. The latest Sunday Times Rich List has 16 of the top 20 as
immigrants. Brits may well want to stay near to friends and family: it’s the Indians, Japanese and Americans who may be tempted to move.

We should add to this Brits who have roots in many tax jurisdictions. They can choose where to do business (or declare tax) like never before. Appallingly little research has been conducted into
the rich, on whom the UK government so heavily depends.
 
3. Osborne’s Achilles Heel. Brown had another theory: that Osborne and Cameron’s greatest fear was an attack on their own backgrounds. His direct ‘toff’
attack backfired, but he found a new way to torment them. He figured he could have them sign up to any attack on the rich — because they would never dare oppose him, then or in government.
When the Tories didn’t oppose a 45p tax, Brown jacked it up to 50p — and still no opposition. When Osborne said it’d have to wait to be abolished, he accepted Brown’s
central fake premise: that the tax raised money. In fact, Osborne increased National Insurance so its now a 52p tax. He is precisely where Brown wanted him.
 
4. How the Treasury faked the 50p tax studies. Brown’s power lay in his mastery of detail. He made his arguments by knowing, and then rigging, the system. He had the Treasury
civil servants claim the 50p tax rate would raise revenue by tweaking the formula which governs it. The IFS sent a Freedom of Information request to reveal the dodgy maths. The Treasury assumed
that the responsiveness rate of the rich — the so-called Tax Income Elasticity — was 0.35. This is a low figure, plucked from the air to allow Brown to claim the 50p tax would raise
£2.7 billion:
 

 
So what’s the real figure? The IFS calculate that it was 0.46 in the 1980s, and even if the rich had become no more mobile (unlikely, given the arrival of globalisation) it would lose
£500 million. The below is how the 50p tax yield changes, depending on your assessment of the Tax Income Elasticity.


So where do we lie? The coming Treasury review into the 50p tax will could include studies into the experiences of the (many) other countries who have the top rate of tax back Britain’s old
40p rate. Some estimates put the TIE as high as 1.0 — which would suggest Britain is losing billions. Plus a less calculable effect on our reputation as a place to do business.
 
5. A flaky Treasury study? Osborne has commissioned a Treasury study into this, which I fear will be bogus. We have only a year or so’s worth of data to go on, and as California
found out a decade ago it’s impossible to separate the effect of a crash from that of the panic tax hike that often follows. Calculating the TIE is the only real honest way to do this
assessment, and every TIE is an estimate. They can be ones grounded on fact (like the IFS did) or plucked from the air (like the Treasury study making the case for the tax). There are rumours that
Osborne is planning a Brown-style list of ‘five tests’ for abolishing the 50p rate, which would be vulnerable to attack because the figures don’t stand up to scrutiny.
 
6. Abolishing the 50p tax needs a strong Chancellor capable of setting the agenda. Michael Gove once observed that history is divided between transformative Prime Ministers, who
change the terms of debate, and fag-end Prime Ministers who just trundle along the same lines as their predecessor. And here is the paradox: Osborne is widely regarded as one of the best
Conservative talents for years, yet he’s still singing using Brown’s autopilot machine. I think he ought to have more confidence in his own ability to change the debate, as Lawson did
in Britain and JFK did in America. Thatcher, at first, was very cautious: she only got going a couple of years into her government. Maybe Osborne will too, and the next Budget will be his
declaration of independence.

The 50p tax is totemic. Brown only ever intended it to hang around Osborne’s neck as a reminder of who’s boss. This month’s budget is perhaps the best chance Osborne will get to
throw it away — and, finally, set his own terms of economic debate.


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