Why lowering the 50p rate may be progressive (next year)

By Kieran Roberts / @kieranlroberts

This morning a letter from 20 economists in the Financial Times arguing that the 50p top rate of tax should be abolished caused quite a stir on Twitter. Their argument runs parallel to the same bogus claim that the bankers’ bonus tax would lead to a “mass exodus” of the city. The 50p rate won’t stop us competing and it’s not driving away investment. That’s not to say it should stay. I want to make my case without being tarred with the same brush as Luke Bozier, so hear me out…

This debate is one of principle. We can’t know the impact of the 50% rate for sure until next year, but there’s every possibility in this case of principle not translating in to policy. Ideologically, a progressive tax system should take the most from those with the broadest shoulders and the poorest in our society shouldn’t be hit the hardest. For anyone on the left, that much is obvious. So there is the principle (and it’s the right principle). The policy manifests itself in the 50p tax rate. This is why it might be wrong.

The table below shows as a percentage how much tax the top 1% paid from 1976 – 2009. It clearly shows that the higher the top rate of tax is, the smaller the share of liability the top 1% had, and most importantly, the greater the liability the poorest had. This is why JFK called it a “paradox”. Evidence shows the lower the top rate, the greater the revenue it gains.

We cannot of course presume complete causality. That the top 1% made a greater contribution as the top rate was lowered may be indicative of their incomes rising far higher than the often stagnating wages at the bottom.

That’s why when we discover the impact of the current 50% rate next year it will be the most crucial column to be added to the table above. If the 50% rate results in, as the data above suggests, the top 1% facing an overall lower liability, it should be looked at again. The principle behind a progressive tax system can be phrased like this: taking more money from the rich than from the poor. If the policy doesn’t reflect that then it isn’t progressive.

Lowering it now would be premature and potentially unfair but it may have to be an option next year. Not because it ‘frightens away foreign investment’ or ‘represses entrepreneurialism’ as the right suggest, but because the principle with which the policy was brought in may not become a reality.