The Tories have taken a political risk – but they may be forgiven

March 21, 2012 2:48 pm

Nobody really knows what the real impact of the 50p tax rate is. It has behaviour impacts – some tax avoidance, some shifting of working behaviour, some reluctance to move to the UK perhaps. These impacts are almost impossible to measure. Many on the right see cutting it as a pro-growth measure. There’s little evidence for this. Pick your argument and run with it – no-one’s going to provide any killer evidence to refute what you say either way.

We do know that despite £16 billion of earnings being shifted into the previous year for tax avoidance reasons (the rate was 40p in that year and the increase was pre-announced), it raised £1billion in the last tax year. Not to be sniffed at when the deficit is running at almost £130billion.

Nonetheless, with so many uncertainties surrounding the tax, the decision on whether to keep it or not is largely a matter of signaling.

George Osborne wants to send a signal to the wealthy and some leading business leaders. Labour sees its abolition as sending out a message that we’re not all in this together: a 5% tax cut for the wealthy as reward for their use of accounting tricks to avoid tax.

We know what the Tories are about. Ed Miliband exposed their thinking brutally and hilariously in his Budget response. The British public know what the Tories are about. But they’ve sort of made a deal. Let the Tories be the Tories – within limits – as long as they sort out the economy and public finances. This tax cut for the rich may be beyond that tolerance level.

The key line in Miliband’s response came in his Downton Abbey gag at Osborne and Cameron’s expense:

“They think they are born to rule but it turns out that they are not very good at it.”

Ultimately, what will determine whether Osborne gets away with favouring the rich – whatever the arguments for or against – is the last bit of that line. Are the Tories seen to be ‘good at it’ or not? They’ve taken a political risk but they may be forgiven. That is, unless they don’t get on top of the deficit and deliver jobs and growth.

We’re into the battle of the political frames and the outcome is very uncertain.

  • BenM_Kent

    Let the Tories be the Tories – within limits – as long as they sort out the economy and public finances

    But the historical Tory record on economy and public finances is atrocious. 

    Their reputation in this field is a mirage. 

    If this is what voters are doing then they are going to get badly let down. 

    • LordElpus

       “But the historical Tory record on economy and public finances is atrocious.”

      As is the Labour one.

  • GuyM

    If you have a tax rate that is simply very uncompetitive in terms of our major economic compeititors then it’s an incentive to avoidance and a disincentive to doing business and basing yourself in the UK.

    I suspect that a very low corporation tax rate along with a competitive higher rate of income tax will mean a significant level of inward investment and less avoidance. At certain levels Laffer is right as shown in the 1980s.

    But Labour always prefer ideology (squeeze the rich) over practicality (optimise the tax take along with business investment).

    The question I’d ask those on the left is would you prefer a 50% rate and significantly less inward investment and jobs than the “rich” gettting a bit more and a growing economy with more jobs for all. I suspect quite a few on the left would prefer more equal misery than unequal progress.

    Or to put it more simply, I’d prefer better job prospects for me at my level for the next 25 years in the UK, than the “rich” (part of which I’ll never be) getting squeezed and fewer jobs at my level being available in future.

    • Brumanuensis

      I would like to – this is a perennial theme of mine – point out, first of all, that the so-called ‘Laffer Curve’ has nothing to do with Laffer. It’s been around for far longer and was referred to favourably by Nikolai Bukharin, a communist associate of Lenin, in one of his speeches. All Laffer did was suggest that tax rates were to the right of the curve – the empirical evidence is mixed on this point.

      Low corporation tax is a silly shibboleth of the right. Some left-wingers will always want to tax the rich more and more, and equally many right-wingers will always want to cut taxes, regardless of the economic benefits. I would have left corporation tax at 28% for the duration of the Parliament. The reductions have been funded by cuts in capital allowances that have disproportionately hurt manufacturers and few firms make decisions on investments purely on the basis of corporation tax rates. Infrasructure and skills sets are equally important and less vulnerable to being undercut by competitors. Germany’s rate is – on average – just under 30%, and there’s little serious risk of capital flight. China’s is 25%. The firms most likely to relocate are financial services – manufacturers being less mobile – and I’m not sure we want to structure our tax system around their needs. Equally, if small businesses are the key to recovery, why is the small business rate being cut by 1% and the main rate by 6%?

      The same applies for the 50% rate. I can’t think of many – any? – small-business owners who pay the 50% rate. It will almost entirely benefit the financial services industry, which already suffered from inflated wages anyway. Even those that do pay it are unlikely to invest their own money in their firms – and if they did, they could claim tax deductions – so the whole ‘bringing home investors’ is a con. Macro-economic strength will determine investment. Judging from the OBR’s forecast that business investment will fall from 7.7% to 0.7% in 2012, fiddling with tax rates won’t help.

      The behavioural assumptions behind the Treasury calculations are bunk too. Why didn’t they give responsibility for research into the 50p rate to the ‘independent’ OBR? Because they’re trying to find reasons to drop it is why*.

      *I’ve read the Mirrlees Review, so I am aware of serious arguments in favour of lowering the rate. But even the IFS admit their behavioural assumptions are derived from the ’80s tax cuts, under Lawson, which took place under very different economic conditions.

      • Dave Postles

         Excellent post.

      • Brumanuensis

        Just to add, British businesses are sitting on a collective cash surplus of £750 billion. They’re not cash poor. If they were, I could understand a large cut. They need an incentive to invest, not an incentive to hoard. 

        • GuyM

          An incentive to invest comes from a secure economy with low interest rates, better education and falling taxes. None of those things Labour would provide.

          • Brumanuensis

            Low interest rates have nothing to do with the government. The others are really a matter of taste. 

      • GuyM

        Couple of quick points.

        Small businesses are not the ones likely to be the key to recoverey, it’s likely to be middle sized, for whom the corporation tax cut will help. Plus there were numerous other bits to help them in the budget.

        The figures for the 50% band showed that under 1/3rd of those paying it were in financial services. But either way it was contributing little and standing out quite markedly in comparison with international competitors. I’d sooner the UK didn’t get a repuation as a high tax economy and no I have no desire for the UK to become Swedan or Denmark with high tax high spend.

        I find it interesting that the left now want to discredit the HMRC, even when the OBR backs its analysis. 50% was wrong, it’s gone and gone well before the next election as well. It’s Labour who will be caught by this in 2015, tax increases or not in a manifesto…. “increased tax – same old Labour”.

        And anyway if the forecasts are right the anti avoidance and property changes will bring more in. With the top 1% already paying 27% of income tax there really is a limit to how you can base your entire economic strategy on tax the rich and bankers bonus (which has been spent already a few times over by the Labour front bench).

        For a neutral budget it was bloody clever and I think it leaves Labour far weaker in the long run.

        • Brumanuensis

          The IFS don’t seem to share your confidence about fiscal neutrality (http://www.guardian.co.uk/uk/2012/mar/22/budget-2012-ifs-tax-reforms). Equally, the OBR’s estimate of the optimal supplementary rate was 48% – as reported by The Spectator’s Fraser Nelson no less – not 45%. Even this seems based on some stretches of analysis (http://touchstoneblog.org.uk/2012/03/did-the-50p-tax-rate-really-raise-less-than-1-billion-in-201011/). Moreover, as Chris Dillow – who has suggested the 50% rate may be revenue-inefficient in the past – has pointed out that the new measures are unlikely to be any more inherently ‘efficient’ as the 50p was (http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2012/03/stamp-duty-labour-supply.html).

          There’s a slight irony about mentioning Denmark, given it’s growth prospects were revised up yesterday. High taxes clearly aren’t choking them off there. Low-tax Ireland on the other hand…   

          The 1/3 financial services point is an interesting one and I’ll concede it. However I still maintain that the main justification for reducing the top rate was its perceived effect on ‘high mobility’ earners and that most other 50p rate payers are unlikely to be as mobile, i.e. the owner of a department store in Redditch, whom BBC Midlands interviewed yesterday.      

  • Dave Postles

    The issue of pensioners is also getting serious discussion.  Some of them feel that they are paying for the concessions to others, although they have ‘paid their dues’ and ordered their finances.  Whether that’s right or not is another matter.  There are 4+million pensioners who may feel aggrieved.

    • AlanGiles

      I never mentioned this, because when you are in the group concerned, it looks like self-interest, special pleading or plain resentment. Doing a “Guy” for a moment, I’m personally OK – I don’t have a lavish lifestyle, but I do have enough not to feel vulnerable – but I know others are not so lucky.

      Osborne I think has made a big mistake in that area, offending a lot of his own blue rinse brigade – wait till the Daily Express and Mature Times (a free newspaper for the over 50s available at all good libraries) get their teeth into this. There will be some, who, though not seriously personally deprived, will consider themselves to be so – some of course genuinely will be so, but the Conservatives traditionally rely on their older supporters – not just to vote but to do the voluntary work at their local constituencies – the poor old chap who delivers their local newsletter is well into his seventies – nearly 80, I think. I think Osborne will be seen to be taking his core vote for granted, much in the same way Blair patently took his for granted – never a good idea, because that does breed resentment.

      On a personal note, acquiring money has never been my greatest concern – I would happily accept higher tax if it was to be used to help youngsters get paid jobs, rather than their enforced charity work for Tesco and Poundland for example. The only thing that annoys me is that it will help the likes of a certain LL poster who constantly boasts about his lifestyle, his important job and status, yet would never help an under 25 year old to get his (or her) foot on the first rung of the ladder.

      • Dave Postles

        Alan – well done – another post with great empathy and solid heart.

      • William

        A thoughtful post and not a criticism of Labour in sight. Perhaps you should stick to this kind of post rather than your usual fare it’s much better.

  • Brumanuensis

    No disagreement here, Anthony.

    Big surprise for me, as Dave Postles has mentioned, is why Osborne targeted pensioners. In policy terms, I’m not massively opposed, but politically it seems odd, given that pensioners are more likely to vote and they will definitely feel aggrieved.

  • Daniel Speight

    Yes we should let the Tories be Tories, in which case there is no need for Labour to be Tories anymore. Maybe we could even get back to Labour being Labour.

  • http://twitter.com/dan_mccurry Dan McCurry

    The pro Money anti Keynes continues to show through. I’m astonished they can cut taxes after all they’ve said about the terror of the deficit. Their entire raison d’etre is to cut the deficit, yet they’re cutting taxes.

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