Time to think again about the 50% tax rate?

By Olly Deed / @ollydeed

Ever since its introduction by Alistair Darling in the 2009 budget, the 50p top rate of income tax has proved controversial. The issue of the top rate of income tax has become something of a minefield at a time of economic austerity. The Labour Party, since defeat in May 2010, has refused to have a conversation about the policy.

As reports emerge suggesting that George Osborne is looking to scrap the 50p tax rate, it is about time we had that conversation.

When Alistair Darling increased the top rate of income tax in 2009, it was touted as a temporary move to help deal with the country’s ballooning deficit. The rationale was simple. The wealthiest in society (for wealthiest, see bankers) caused the crash, so they should pay to clear it up. The new rate would be temporary and assessed in the future.

There was a vast amount of criticism flying about in the media, some of it from figures in the Labour party like Stephen Byers, but in the main, it was well received in the public who had a clear desire to see the pain shared fairly across society.

Fast forward two years and we have a Conservative chancellor asking the Inland Revenue to assess the effectiveness of the top rate of income tax and Labour Party members and politicians crying foul before we’ve seen the results of the review. The knee-jerk response to this news doesn’t do the party any favours.

So let me pose a couple of questions that the Labour Party needs to muse on before the conclusion of the review.

If the Inland Revenue concludes that the tax base has decreased as a result of the increase in the top rate of income tax, should we continue to support a 50% top rate?

The UK has higher rates of personal taxation than many of our competitors. France has a top rate of 41%, Germany 45%, Italy 45% and the United States 35%. Does the Labour party support competitive personal taxation and do we think our current top rate of income tax is competitive within the context of the global economy?

Having mused on the second question for a while, my own instinct is to support the abolition or reduction of the top rate of income tax, if the Inland Revenue concludes that the 50% rate has been counterproductive. I sense I might be out on a limb on this one – Ed Balls seems to favour lowering the top rate income tax threshold resulting in the 50% rate kicking in on earnings over £100,000 and Ed Miliband favours making the current system permanent as a “point of principle”.

Whilst the retention of the 50% tax rate has remained popular amongst the public, according to YouGov polls commissioned in January and July, the public mood may well change if the measure has proved unsuccessful in raising money to pay down the deficit.

Tax policy driven by dogma and gimmickry is no good for the country or the Labour Party. Sorry to use the cliché, but Labour should be trying to regain the mantle of aspiration; high marginal tax rates damage any prospect we have of achieving this.

If the Labour Party is sensible, it will support the abolition or reduction of the top rate of income tax and couch the reduction in a series of tax cutting measures designed to kick-start our ailing economy. Ed Balls is absolutely right to advocate a temporary cut in the rate of VAT (to 15% if he is brave) to stimulate consumption in the UK. He should also propose accelerating the increase in the personal allowance to £10,000 and investigate the case for going even further. This would have the added benefit of incentivising work. The best way to make work pay is to take low earners out of tax altogether.

With the economy flat-lining, the Labour Party has the opportunity to be brave on tax. The last Labour government was right to use the levers of government spending to steady the economy when it looked like the banks were going to collapse and with them the British economy.

The next Labour government should not be afraid to use competitive taxation policy to stimulate the economy in the future. It is not right wing to cut taxes. Often it is sensible economics. And a bit of sensible economics would do the Labour Party’s credibility no harm at all.