Yesterday morning interviews with the IFS, Mr Balls and Mr Alexander on the Today programme failed to do justice to the argument over the 50p tax rate. The IFS and the BBC sat on the fence, and ignored the substantial evidence that the UK has experienced a serious shortfall of Income Tax receipts from high earners since the introduction of the 50p rate.
The IFS and the BBC were strangely silent on the fact that in 2009-10 there were 16,000 people declaring incomes in excess of £1million in the UK for tax, and that this fell to just 6000 people with such incomes after the introduction of the 50p rate. Many left the country, or worked less hard, or found legal ways of declaring less income.
Evan Davies did succeed in reminding the audience that a 50p tax rate brought in to “share the burden” of the Crunch was not brought in by Labour in 2008 or 2009, during or immediately after the Crunch it was meant to help pay for. Instead they brought it in a few days before the election. This should lead people to ask whether it was a political trap rather than sound policy designed to help pay for the problems. If you really thought it was going to bring in say £3bn why not introduce it immediately in 2008 as you saw the surge in the deficit and the banks collapsing? Why not bring it in in 2009 as things started to settle down again? He also extracted from Mr Balls the wise statement that he favours lower tax rates at all income levels, rather than a pledge to restore the 50p tax rate.
Let me be unpopular. I think Mr Brown as Chancellor was right to keep the top rate of Income Tax at 40% throughout his period in office. I assume he did so not out of love of the rich, but because he realised that a higher rate would drive some high earners out of the country and lead some companies with large numbers of high paid people to locate elsewhere. Mr Brown was both a good socialist and a pragmatist. He knew that to run a successful enterprise economy he needed to do deals with the rich and with powerful international companies, even if he did not like them.
I have consistently recommended returning the top rate to 40%, both in the closing days in opposition and now to the Coalition government. I think that lower rate would bring in more tax from the rich.
The government has estimated that they have lost £7bn of top end income tax as a result of the 50p rate. They have identified a large number of people on very large incomes who have left the country. The loss of these people also means less revenue from the higher rates of CGT, Stamp Duty and luxury taxes they have imposed. It is a great pity the UK establishment will not allow an honest examination of the causes of the large reduction in top end income tax. It is too much of a coincidence to deny that the 50p rate has done damage to revenues, though of course there are other factors as well depressing some higher incomes post Crunch. The fact that there were still so many people declaring £1m incomes post Crunch prior to the 50p rate shows it is not a simple matter of the damage done by the recession. A medium sized open economy cannot get away with substantially higher rates of tax than competitor countries.
I expect neither Labour nor the Lib Dems will pledge to raise the top rate of Income Tax in their next Manifesto.