My my, things do move quickly. Last week when the letter condemning the 50% tax rate as hampering growth was published in the DailyTelegraph the odds on anything happening in the forthcoming budget were remote to say the least. This week it has emerged that it is now apparently subject to complex negotiations within the coalition. Watch this space as they say.
I have to admit I am slightly sceptical as to whether the 50% tax rate is having a material impact on growth. I have always believed that real entrepreneurs prefer to re-invest their profits in their businesses rather than extract large salaries and dividends, at least in the growth phase. For them it is the thrill of building and selling a business that makes them want to invest, and the tax rate that really matters to them is Capital Gains Tax one not the Income Tax one. Equally external investors tend not to be big fans of highly paid executives much preferring them to seek reward through value creation and capital growth.
Still the 500 odd businessmen that signed the letter are adamant that it is having an impact . Tales of delayed or cancelled investments abound. One made the point that in paying more than 50% of his income to the government he questioned who he was really working for. (Clearly he is too young, as am I, to remember the days of a top rate of 83% allied to an investment income surcharge of 15%. Now that was a real disincentive.)
Another argument against the 50% rate was that it was not raising any revenue because people are apparently finding ways of avoiding paying it. Well there’s a surprise. High earning people will find a way of avoiding the 50% tax rate just as they would if the highest rate was 40% or 30%. They do it because they can and want to.
Maybe that is the clinching argument for a “mansion tax”. People can move. Property can’t. Still I am sure that there are accountants already beavering away to find a way to avoid such a tax.
To me the complex tax credit system, the proposed removal of child benefit from higher rate taxpaying families, and the pernicious 60% effective tax rate that results from the withdrawal of personal allowance for incomes between £100k and £113k are far bigger tax disincentives to effort and enterprise. The people who suffer these tax traps find it much more difficult to avoid them, and often just don’t bother to put in extra effort for little or no extra reward.
The sad thing in all this debate over the 50% rate is that it is a sideshow to the real issues affecting growth. The bank finance logjam. The problems of raising relatively small amounts of equity. The growth of corporate cash mountains and their reluctance to invest or adhere to fair payment terms. The lack of confident consumers with money in their pockets and a degree of job security. These are the issues that should be occupying the minds of our policymakers.
I think it is fair to say that the 50% tax rate is a symbolic gesture rather than a significant revenue raiser. But maybe we should consider what it really is a symbol of. For the left it is a symbol of the politics of fairness and wealth redistribution. For the right it is a symbol of the politics of envy and penalising success. For the real economy it is a symbol of how easily we can be sidetracked from dealing with the real issues within the economy that are holding back growth.