Taxing the rich – cure or curse for the economy? We ask a panel of experts

7th September 2011

High-profile economists are calling for Britain's 50p top rate of tax to be scrapped, as the chancellor George Osbourne comes under increasing pressure amid fears this is damaging the economy.

A 20-strong group signed a letter in Wednesday's Financial Times (paywall) expressing concern that Britain's top rate of tax is doing "lasting damage to the UK economy".

However, the call was rejected by Alistair Darling, the former chancellor who unveiled the 50p rate in his 2009 budget, who said that removing it before the end of the banking crisis would be "grossly unfair", reports the Guardian.

Yet the letter claims the top rate introduced by the last Labour government, which applies to high earners on an income over £150,000, "punishes" entrepreneurship. This follows opposing calls a month ago by billionaires such as Warren Buffett to be taxed more.

Not all experts agree, reports the Guardian. Paul Johnson, director of the Institute for Fiscal Studies and not a signatory of the letter, said it was much too early to give up on the 50p rate: "The Treasury has been taking a punt on whether [the 50p rate] will raise money. It is taking a risk, but it is not a stupid punt.

Among the comments, Neilwilson says: "The 50% tax rate should stay. Anybody with any go in them won't be paying it anyway since they'll be using the various avoidance tricks that are available to them (Limited company wrapper, capital gains routes, offshore shareholding, etc). The only people who will pay 50% rates will be high paid employees in the city."

Here, a BBC video explains the story…

But what about other experts? Do they believe it wise to boost the economy by taxing the rich? And should the 50p rate be scrapped?

We ask Mindful Money's panel of bloggers their opinion:

Mindful Money economist blogger Shaun Richards points to the "Laffer Curve":

He says: "This is a concept created by Arthur Laffer who was an adviser to US President Ronald Reagan in the 1980s.

"He postulated that there is a link between tax rates and tax revenue received by a government and that it could be represented as a curve. Furthermore this curve suggests that, as taxes increase from low levels, the total tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point would cause people not to work as hard or not to work at all, leading to a reduction in total tax revenue. Eventually, if tax rates reached 100% – then all people would choose not to work because everything they earned would go to the government. Just to be clear it is usually applied to income tax rates and revenue.

"This was applied by both the UK and US governments in the 1980s. Both reduced higher rates of income tax and both received higher levels of tax revenue, in fact income tax revenue increased considerably (of course not all of this was due to the Laffer Curve!). In essence at the levels of income tax then being levied it worked. This does not mean that it works at every level of income tax but does mean that moving back to those sort of levels is likely to reduce rather than increase the level of income tax revenue received."

Daniel Knowles comments on a Daily Telegraph blog: "For a year or two, hiking up taxes to raise revenue works: it's not worth the trouble of moving to Switzerland if you only dodge one year's tax. But over time, the peak of what economists call the Laffer curve shifts – progressively, you raise less money as people react to higher taxes. Eventually, you reach a point where you're actually losing revenue. So the case for outlining a firm timetable to scrap the 50p rate is a strong one. That is why George Osborne has hinted that the tax won't last beyond 2013.

"But while the economic case is strong, the politics is less easy. A poll for the Times in 2009 found that 57 per cent of people are in favour of keeping the higher rate, while just 22 per cent oppose it. Those numbers will probably shift as the destructiveness of the policy becomes clearer, but when real living standards are being squeezed by other tax rises – VAT and National Insurance in particular – it won't be easy to argue for a tax cut that mostly benefits bankers."

Shaun Richards adds that it doesn't stop at the 50p tax rate – there is also a 60% tax rate. "For incomes above £100,000 the Personal Allowance is taken away in two stages. This rather complicated measure creates two zones where the marginal tax rate is in fact 60%."

Simon Ward, also a Mindful Money blogger and chief economist at Henderson, adds that there are certainly two sides to the argument: "The top rate should be reduced to encourage entrepreneurship, effort, foreign investment and less tax avoidance.

"However, there is an equally strong case for reducing high marginal rates lower down the income scale, for example related to the withdrawal of tax benefits and the personal allowance."

Turning to the psychological aspect of taxing the rich to boost the economy, Kim Stevenson, Mindful Money's resident psychologist, says on his blog of the super rich asking to be taxed.

What is the problem with taxing by removing special allowances only available to the super rich? He asks.

"The more complicated they make the tax laws, the more folds and loops there are in the fence, the more scope there is to go over, under or through it.

"The rich have the time, the money and the resources to find the holes. I know, I was one of the people they paid to find them and exploit them.

"The poor can't – I wouldn't have been able to afford my own advice at the rates at which I was charged out (Kim used to be a financial adviser).

"There's a difference between creating wealth and speculating to take advantage of tax laws. The tax laws are supposed to protect genuine investment that benefits society, not reward speculation on something such as what you think the property market is going to do.

"Surely, if the people who employ the poachers actua
lly want the gamekeepers to win, it isn't beyond the wit of mankind to arrange the taxes, just this once, to do what they are supposed to do."

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