There has been a lot of talk recently about the 50% tax rate and its impact on entrepreneurs and building businesses. In my view this is a total red herring. The 50% rate has always been symbolic and has had little impact on either revenue raising or wealth creation. Constant focus on this is a waste of time and a diversion from discussions about the real needs of a wealth creating economy.
Very few business plans that I see include salaries for entrepreneurs pitched at anywhere near £150,000 (and if they do these salaries don’t last long as funders will not wear them). Indeed the plans in which I do see such salaries are invariably prepared by ex-corporate types who have not quite grasped that life is a little different in Enterprise Britain to what they have been used to
Most real entrepreneurs and wealth creators have a long term view of financial gain. That is why the various reliefs available that reward investment in growth businesses, such as entrepreneurs’ relief and the enterprise investment scheme (EIS), are so important. They are real incentives that encourage the building of the sustainable businesses that the UK economy will need in future. These incentives, coupled with a business friendly regulatory environment, will create more jobs and wealth than any tinkering with the top tax rate.
Far more pernicious in my view is the effective tax rate of 60% levied on incomes between £100,000 and £112,000, the result of the gradual elimination of the personal tax allowance. This can have a potentially negative effect on the individuals who may not have the entrepreneurial spark necessary to grow a business, but are vital lieutenants, providing necessary back up and support as it moves beyond the start-up phase. It equally cannot be “managed away” as easily as the 50% rate can. I suspect that a FOI request will reveal that this is much more lucrative than the 50% rate is, and as a consequence is unlikely to be changed anytime soon.
The only way that the 50% tax rate is likely to get in the way of entrepreneurial activity is if it distracts politicians from doing what is really required to get such activity moving. Talking about tax can sometimes be as damaging as the tax itself.
P.S. Apparently Belgium has now broken the world record for not having a government. During this time it seems that its economy has grown unhindered. As one would have it in twitter world #justsaying…