It looks like at the Budget we’ll have the announcement of new property taxes. Reports suggest there will be a higher stamp duty rate for high value properties. That would be a repeat of the same approach taken by Gordon Brown more than once. Some commentators are applauding it as an economically rational move to tax property rather than income, but is that actually what is happening?
No. The revenue from new taxes on very high value properties will likely be underwhelming. Taxes on labour income – Income Tax and National Insurance contributions – raise over £250 billion each year. Capital Economics have estimated the new Stamp Duty rate could raise £400 million a year, just 0.1 per cent of the amount raised by those labour income taxes. Maybe George Osborne will find a way of extracting more than that. But even if he raised ten times as much it would still not be enough to cut a penny off the basic rate of income tax.
This just won’t be the rerun of the switch from taxing income to taxing consumption in the 1980s that helped finance substantial cuts in marginal income tax rates, though those lower rates actually largely financed themselves. There aren’t enough very high value properties for a tax on them to raise a lot of money.
If politicians try to tax property more broadly they will find it is extremely unpopular. It is no accident that our grassroots campaign has always been focused on Council Tax more than any other tax. First time buyers find it incredibly hard to pay Stamp Duty. In the United States, tax revolts have often responded to high property taxes and academic research suggests those taxes are particularly salient. Britain already raises more in property taxes than any other developed country, taking a fiscal windfall from the high prices many families struggle to pay a mortgage on, and if politicians try to raise even more from property they’ll be voted out of office.
Higher taxes on a small number of very high value properties might be a useful political gesture for George Osborne. It is no substitute for the grander vision for the tax system that Allister Heath rightly argues he needs to set out today.
Deputy Prime Minister Nick Clegg has proposed what he calls a new Tycoon Tax. The proposal sounds quite reasonable but in reality it would produce unfair results and, judging by past experience of these kinds of policies, affect plenty of non-”tycoons” over time.
There are four important points to bear in mind: most people on high incomes pay a lot of tax so this won’t affect many of them; sometimes people appear to pay low taxes on their income because they have already paid taxes elsewhere; a similar tax in the United States (the Alternative Minimum Tax – a better description of the proposal) has become a heavy burden on the middle class; and a tax system functioning effectively wouldn’t need this kind of back-up.
There is a constant stream of ideas emerging from Westminster for the next big means to get more money out of high earners. Many of them are premised on the bizarre idea that, for the rich, tax is almost voluntary. Richard Murphy was repeating it over the weekend when we discussed the mansion tax on the BBC Radio 4 Today programme over the weekend. Even the most reasonable plan to increase taxes on high value properties, an increase in the range of bands for council tax, would require a costly revaluation that could easily be used as cover for a more general increase in rates.
In announcing his proposal for an alternative minimum tax, Nick Clegg said that:
If you’re earning millions per year, if you’re able to pay an army of lawyers and accountants to basically pick and choose what tax you are paying, if you are paying as low as 25%, 20% or even less in tax, there should be a minimum fair share that you should pay to society.
In 2007-08, the highest earning 1 per cent of the population earned 13 per cent of total income but paid 24 per cent of total income tax, £39.4 billion. Does the Deputy Prime Minister really think that was all some kind of voluntary donation? That the rich paid all that money – their share of taxes is nearly twice their share of income – for the fun of it?
No. There are some ways that high earners, particularly foreigners, can avoid some taxes like Stamp Duty. It is hard to see how that would be captured by a Tycoon Tax though, as it isn’t related to their annual income. It would be better to either find a way of closing the Stamp Duty loophole or ask whether a tax on moving is a good idea in the first place or if it should be abolished over time for the rest of us too.
There are other loopholes but there are also situations where low tax rates are charged because the income is taxed in other ways. For example entrepreneurs pay a low rate of tax on capital gains when they sell businesses that they have established. But that income is already taxed because expected taxes on future profits depress the value of the shares they are selling. If we add to the double tax on growing businesses that will mean fewer jobs, less innovation and lower wages for workers. Sometimes tax bills are also lower because money has been taxed abroad.
That won’t just be a problem for “tycoons either”. As I mentioned earlier, in the United States they have a tax called the Alternative Minimum Tax, a more accurate description of what Nick Clegg is proposing here. Representative Paul Ryan spoke to the Cato Institute about why that tax should be abolished:
The AMT is a federal income tax that is imposed on top of the existing income tax system. In 1969, AMT was passed to go after 155 rich people who were using deductions and loopholes to avoid paying any taxes. And while subsequent tax reform closed those loopholes, the AMT remained. Most critically, the AMT was never tied to inflation, so that today the AMT is targeting an ever-increasing fraction of the middle class.
About 20 million Americans were subject to AMT in 2006; 23 million in 2007. Their estimated increased tax liability was about $2,000 per person. According to the Congressional Budget Office, by 2010, if nothing is changed, one in five taxpayers will have AMT liability. Nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax.
So the AMT represents an enormous tax hike on the middle class. Going forward, it will represent an even larger tax increase. That is a major reason it must be repealed.
If you think that won’t happen here, then you haven’t been paying attention as tax after tax – starting with Income Tax – has gone from being a tax on the rich to a tax people have to pay on much more modest incomes.
There is a much more effective strategy to get greater revenue from high income taxpayers, one that we have tried in the past with great results. Cut marginal rates of income tax across the board giving everyone a better deal. Then simplify taxes so there are fewer loopholes and everyone pays the same single rate on different streams of income. That can be done, it’s the heart of the 2020 Tax Commission’s plan. It will be much more productive than yet more lazy sticking plasters and won’t be the same kind of threat to our prosperity.
At the end of last week, I discussed tax evasion on the Radio 4 World Tonight programme with the host Ritula Shah and activist Richard Murphy. Everyone should pay their fair share but, as I argued, condemning those who break the law is only part of the equation. We also need lower and simpler taxes which are easier to pay.
At the moment the tax system is so complicated and opaque that the squeezed middle see benefit fraud at the bottom end of the income distribution and the rich hiring expensive lawyers and accountants to avoid taxes at the other end. Some think it is only fair that they cut a few corners. That is one reason why we need a simpler tax and benefit system with fewer loopholes. If everyone is reassured they aren’t the only mugs paying their taxes, then that will undermine a lot of excuses for tax evasion.
But that is also why it is important we don’t overstate the extent of the problem. Exaggerating how many people avoid their taxes only adds to the sense that it is a normal, and to some extent, acceptable thing to do. Unfortunately it does appear that Richard Murphy has seriously overstated the extent of the “tax gap” in his research, which he argues is £120 billion.
In Parliament last year, Treasury Minister David Gauke noted that “estimate does not take into account those reliefs and allowances that Parliament has determined should be available”, including “double taxation relief”. Christie Malry has written about a number of critical problems with Richard Murphy’s work, which suggest the HMRC estimate of around £40 billion is more reliable.
Murphy frequently makes use of flawed reasoning to justify his wild claims. For example,he suggests that the HMRC figure for tax paid late is “just £1.8 billion” while “the Ministerial claim is … £3 billion”. Hence he concludes that the correct figure must be £28 billion.
With respect to personal avoidance, he notes that the HMRC figure is £1.1 billion and that George Osborne has appeared to say that the avoidance figure for capital gains tax alone exceeds £1 billion. He therefore concludes that the Tax Research UK figure (of £13 billion) is “confirmed”.
Yet, when data appear to disprove his estimates,he merely says that “more work is needed to support the Tax Research UK figure”. In fact, the honest response would be to admit that the Tax Research UK estimates are wrong.
That kind of problem might be why, as Tim Worstall reported on his blog, when asked to choose between his estimate and the one produced by HMRC, respondents to a Tax Journal online survey went with the HMRC figure:
Readers were asked whose was the better estimate of the tax gap. While 166 favoured HMRC’s estimate of £42 billion and 83 favoured Murphy’s estimate of £120 billion, a further 151 readers said that both were ‘wrong’.
Tax evasion is illegal and rightly so. We should also try to reduce tax avoidance which often distorts economic decisions and undermines confidence that everyone pays their fair share. But we should do that by closing loopholes and reducing the incentive to dodge taxes with lower and simpler rates. And it won’t help at all if we overstate the scale of the problem.
The Deputy Prime Minister, Nick Clegg, has said he thinks the Coalition should speed up the implementation of its pledge to increase the amount of money people can earn before they have to pay Income Tax (the ‘personal allowance’) to £10,000. The level is currently £7,475 and is scheduled to rise to £8,105 but Mr Clegg argued that poor families being squeezed by the VAT hike and tough economic conditions deserve a break from taxes sooner:
“Today I want to make clear that I want the coalition to go further and faster in delivering the full £10,000 allowance, because bluntly the pressure on family finances is reaching boiling point.”
Quite right. Mr Clegg said much the same thing in January 2011 and we congratulated him then and urged Mr Osborne to take heed. But his other idea, to raise a new tax on houses worth over £2 million, is the wrong way to fund it. As Allister Heath wrote in a blistering editorial in yesterday’s City AM, the Coalition needs to wake up to the urgency of the economic problems Britain faces:
“IT is hard to understand what the coalition is playing at. Britain’s economy is stagnating, GDP appears to have shrunk in the last three months of 2011 and yet the government exudes no sense of emergency, no impression that it realises that we are in a national crisis and that radical, drastic and unpopular action must be taken.”
Raising the personal allowance to take the least well off out of taxes is right on its own merits and the Chancellor should listen to the Deputy Prime Minister. Taxing the poorest on such low incomes and then giving the money back is crazy and kills incentives for people to work and improve their lives.
Despite what some on the left may claim, raising the personal allowance will benefit the poor most, as a graph by TPA Director Matthew Sinclair illustrates. Another way of looking at the policy is to consider how much the move would reduce people’s Income Tax bill by. As you can see from the graph below, it would cut the tax bill of someone earning £26,000 a year by 14 per cent. An earner on £18,000 would enjoy a 24 per cent cut while those on £14,000 would have their tax bill slashed by 39 per cent. Obviously, those on £10,000 or less would have their tax bill completely wiped out. That has to be a good thing and shouldn’t be opposed simply because people below £7,475 already don’t pay any tax and therefore wouldn’t benefit!
But such an obviously popular and ‘progressive’ move should be used to help the Coalition take necessary steps that might otherwise be unpopular. Abolishing the 50p rate of Income Tax, for example. And it should be funded through scrapping wasteful schemes like High Speed Rail 2 and reversing the rises on international aid and the NHS budget, not from even higher taxes on other people.
Yesterday evening I took part in a debate on Radio 4′s PM programme, with the IPPR think tanks’s Nick Pearce, about high marginal taxes rates, particularly on income and capital gains.
You can listen to it here:
Last year Nick wrote that, the “over-reliance of the UK on revenues from financial services, the housing market and wealthy individuals was brutally exposed in the financial crisis”. The kind of argument he was making on Radio 4 yesterday would exacerbate that problem.
The amount people pay in Capital Gains Tax is often quoted and it can often sound low, many politicians have argued that we need to increase the Capital Gains Tax rate to the Income Tax rate as a result. What they miss is that Capital Gains have already been taxed. To understand why look at the Gordon Growth Model:
Where P is the price; D1 is the value of next year’s dividends; r is the cost of capital; and g is the rate at which dividends are expected to grow. Of course, things can get a lot more complicated than that in the world of high finance. But the fundamental picture is the one that simple equation sets out: the value of shares is the earnings they will pay to the current owner or someone else who might own them in the future.
If a company’s profits rise then that currently gets twice. Once by Corporation Tax as profits (and often when it is paid out in dividends too). Then again because the rise in profits increases expected dividends, immediately or in the future, and thereby increases the price of the shares (producing a capital gain).
If we want more good jobs to go around then people who invest in rapidly growing new companies, the ones who get hit by that double tax, are really important. Back in 2009 we set out just how important in a paper on tax and entrepreneurship.
So no, Mitt Romney almost certainly didn’t pay just 13.9 per cent tax and it will be a huge risk to our future prosperity if we started setting new tax rates as if he did.
Some rich Americans probably do find elaborate ways of avoiding paying their fair share in taxes. One of the problems with a tax system that is too complicated and poorly designed is that those with the most expensive lawyers and accountants to work the system can get a better deal.
But actually the United States, with its relatively low marginal tax rates, gets more revenue out of the rich than any other developed country, according to research by the Tax Foundation based on OECD figures. Far more than many European countries that have much higher rates. Over time, and as the success of tax cuts in the 1980s shows, tax cuts can be so economically successful that they increase revenue.
Lower spending and lower taxes, particularly lower marginal rates of tax on your income, have a great track record – established by years of academic research which we’re working to summarise with the 2020 Tax Commission – of delivering greater prosperity. And simple, proportionate taxes are a more reliable way of ensuring everyone pays their fair share.
Campaigning for the tax system to be more transparent and simpler has always been one of the core missions of the TaxPayers’ Alliance.
And so in broad terms we very much welcome the consultation which was launched this morning by Treasury Minister David Gauke entitled Modernising the administration of the personal tax system: Tax Transparency for Individuals.
The opening line of the document states:
“The Government wants to hear views on how increased transparency and accessibility to tax information can build greater awareness and understanding of how the system works.”
Frankly, it ought to read: “Increased transparency and accessibility to tax information DOES build greater awareness and understanding of how the system works – so we are going to get on and do it.”
Frustrations about the pace at which the wheels of government turn aside (the document is now subject to a 12-week consultation, which should at least allow the Chancellor to deliver some action in the Budget next March), most of the substance and direction of it is to be welcomed.
The Government is already looking at how in some other countries there are systems in operation whereby individuals can go online to see how much they are paying in tax month-by-month and year-on-year.
At the event launching the consultation this morning, David Gauke showed prepared mock-ups of what a personal HMRC web page could look like for Britons. This would enable people easily to see how much of their income goes on income tax and national insurance contributions – including the oft-forgotten employer’s element of the NICs. This would show people year-on-year whether they were paying more or less in tax and would indeed be a welcome leap forward in transparency. As the above video produced by the Treasury itself demonstrates, there is widespread public ignorance about how much tax they are actually paying.
Also today, the Government published its latest position on the integration of the operation of income tax and National Insurance Contributions, in response to a consultation it held on the issue earlier this year.
The TaxPayers’ Alliance has called for a complete merger of National Insurance and Income Tax, as explained in our recent report, Abolish National Insurance, and that is what we recommended in our response to the consultation: National Insurance is almost indistinguishable from Income Tax in its function of raising revenue and the current system obscures public understanding of tax on earnings.
It is disappointing, therefore, that the Government has not been persuaded of the merits of this case, concluding as it does that it wishes NICs to “retain an identity distinguishable from income tax” as part of maintaining the so-called contributory principle.
It does, however, accept that “closer integration of the operation of income tax and NICS has the potential to reduce burdens on business, remove economic distortions and improve fairness” – although does not foresee being able to implement any changes until “around 2017”.
At a time when businesses are crying out for red tape to be reduced, five years does seem an extraordinarily long time to wait for any action on this.
This evening, Channel 4 News at 7pm will be screening a debate between me and the actor Bill Nighy on proposals for a Financial Transactions, or Robin Hood, Tax. UPDATE: You can watch the video after the break.
Bill Nighy wrote for the Guardian recently arguing that the Financial Transactions Tax was an all-round wonderful idea only scuppered by bankers not wanting to pay their way. The reality couldn’t be further from the truth. The reality is that the people who would pay this tax would be savers struggling to afford a comfortable retirement. Already struggling with high inflation, they would be hit again as the share prices that underlie the performance of most pension funds would be depressed. In the longer term, particularly if the tax isn’t applied globally, workers would suffer too with fewer opportunities and lower wages as investment went elsewhere.
He hides that problem with the misleading statement that according “to the IMF it would be paid predominantly by the richest”, which he then translates for the rest of his article into this money coming out of the pockets of the likes of Goldman Sachs executives. The reality is that the IMF paper he is referring to says that burden would “fall on owners of traded securities, at the time the tax was introduced, as the value of stocks, bonds and derivatives subject to” the new tax. In other words, savers.
Of course people with savings are generally significantly better off than those without them. For example, people on benefits aren’t saving and their retirement income will depend on the level of state pension entitlements rather than investment returns. The other group this won’t affect as much – though they are actually relatively well off – are public sector workers, whose unfunded, defined benefit pensions also aren’t dependent on investment returns.
Savers will pay and, while they are on average significantly better off than people who aren’t saving, they aren’t all plutocrats. We are talking about plenty of normal people struggling to save and invest, to build up a pension fund and provide for themselves and their family. This certainly isn’t a tax on the banks.
British politicians are constantly urging people to save, that’s why things like tax free ISAs are available. Hitting them with a new tax would achieve precisely the opposite and further put people off putting money aside for their old age. That means taxpayers will have to pick up the bill instead and poses a mortal threat to the long term stability of our public finances with an ageing population.
In the longer term, by making it more expensive for companies to raise finance this measure would depress investment. Particularly in an open economy like ours, and if the tax wasn’t truly global, capital would “flow out until its after-tax return was restored to the world market level.” Less investment means fewer jobs and lower wages. As the IMF say: “In the long run, capital owners would therefore not bear the burden of the STT; it would fall on workers, who as a result of the smaller capital stock would be less productive and receive lower wages.”
Other countries have seen that these taxes don’t work. Australia abolished a stamp duty on shares in 2001, for example. The IMF reported that these taxes have been in steady decline internationally in recent years. We do have a stamp duty on shares in Britain but it is a disastrously inefficient tax, despite some differences in the conditions making it less onerous than a pure transactions tax.
In 1999, researchers at the London School of Economics found that while other transaction costs for UK equities had more than halved while Stamp Duty had remained constant. As the Forsyth Commission reported (pgs. 103-104), those higher transaction costs depress share prices by up to 10 per cent. One study suggests that if it were abolished the increase in the market capitalisation of the FTSE All Share could be in the region of £150 billion. That suggests the around £4 billion a year the tax raises is pretty poor value. If the Robin Hood Tax is supposed to raise much more money than that, then it will do even more to destroy share prices.
And stamp duty on shares also makes it more expensive for companies to raise the finance they need to grow and compete with rivals abroad. Oxera found that abolishing the tax would reduce the cost of equity by 7 to 8.5 per cent on average, but technology companies for example might pay up to 12 per cent less. That means abolishing the tax would increase investment, and bring more jobs and higher wages for British workers. Bill Nighy wants us to go in the opposite direction.
This tax would be bad for the City, but that doesn’t make it good for the rest of us. It would be an immediate disaster for savers and a longer term disaster for workers. It would also increase volatility in financial markets, as I have written before, thereby increasing risk.
And that’s before we get onto how the money will be spent. Bill Nighy’s idea is that it will go on aid for poor countries. But even if you think the rapidly rising development budget – while taxes are rising and spending is being cut here in Britain – isn’t enough, European politicians appear to have other plans. They want to use it to finance their wasteful spending and grand plans in Brussels. Is that where you want your savings spent?
This is a bad plan and the Government should reject it regardless of whether international agreement can be secured.
This weekend, you may get an unwelcome letter on your doormat from the taxman. Thanks to yet another blunder over a million taxpayers will have to pay back an average of £600 each, including 150,000 pensioners. Excessive taxes, rising utility bills and excessive fuel duty are already hitting families hard, so the last thing they need is for HMRC to demand cash from them – particularly when it’s HMRC that made the blunder in the first place.
Unfortunately, this seems all too familiar. Just over a year ago an almost identical error occurred, affecting a similar number of taxpayers. The Public Accounts Committee also took HMRC to task, saying that they had caused “unacceptable uncertainty and inconvenience to the taxpayer.” Since then, many have appealed demands for repayment. Incredibly, according to reports, some appeals have been turned down because taxpayers ‘should have picked up’ on the errors. With just under 70,000 staff – the same as the population of Doncaster – you’d have thought that sorting these things out was the job of this army of bureaucrats.
Why can’t HMRC get it right? Is it incompetent staff? Is it down to bad Government IT? The real answer is that the hideously complicated and labyrinthine tax system means that administering it is costly for taxpayers. And three times over too: once in the high taxes they pay as a result; twice in the even higher taxes to pay for enough staff to cope with it; and thrice in response to letters from the taxman asking them to cough up again. It’s simply not good enough, and minor tweaks to the tax system will not remedy these ills. We need significant tax reform that drastically simplifies the system and reduces the burden on ordinary families and everyday businesses. Look out for the report of the 2020 Tax Commission in the new year, which is working out the steps to get us there.
The Institute of Directors (IoD) has published ‘The Route Back to Growth’, a policy paper by the their new Director General Simon Walker, listing measures the Government should take to boost the UK’s faltering economic growth rate. Yesterday also saw the Chancellor of the Exchequer’s speech to the Conservative party conference in which he reaffirmed the Government’s commitment to its fiscal plan but revealed little new in the way of pro-growth and pro-enterprise measures.
The paper has 15 solid policy proposals on areas such as public sector performance, employment policy and taxation. Mr Walker explained the importance of the challenge to raise the UK rate growth rate:
No aspect of economic policy is more important than returning Britain to a growth trajectory. Without the belief that UK economic growth is expanding, confidence will wane, international investment will dwindle and British consumers and taxpayers will be left picking up the crumbs at the tables of faster growing competitors. The Government’s deficit reduction programme is a step in the right direction – but it must go faster and further before the economy is on track and prosperity returns.
Among the policy recommendations are: abolish of the 50p rate of Income Tax, continue cutting Corporation Tax to 15 per cent by 2020, limit public spending to 35 per cent of GDP by 2020, review EU directives to remove ‘gold plating’ of regulation, decentralise public sector pay bargaining and the introduction of ‘no fault dismissal’ for when work relationships have simply deteriorated beyond repair without fault being apportioned to a single person.
These are the sort of policies Mr Osborne should be studying in detail and implementing if he wants to get serious about growth. Creating a new ‘sub prime’ credit market in bonds for small business isn’t the solution to Britain’s economic problems. Freeing business from over-zealous regulation and over-complicated and burdensome taxation to create the prosperity we need is.
Micro-blogging website Twitter is to set up a new HQ in Dublin and I’m willing to bet that it’s not because they love Guinness.
Ireland’s attractive 12.5 per cent corporate tax rate is bound to have been a big sweetener for the firm, which has been valued at upwards of £5 billion.
The news is a blow to the Treasury, who were hoping that a London office opened earlier this year would become Twitter’s European HQ. But catchy names, like Tech City and Silicon Roundabout, and even the irresistible allure of Boris Johnson are not going to be enough to convince the micro-blogging website to bring its money over here when our main rate of corporation tax is 26 per cent.
The list of internet firms who are now benefitting from Ireland’s lower corporation tax reads like the bookmarks menu on most people’s internet browsers: Google, Facebook, Amazon, Yahoo, eBay and Microsoft all have offices there, to name but a few. The presence of businesses like these means more jobs in Dublin. Google alone is one of Dublin’s biggest employers, with 2,200 staff.
With modern technology allowing them to work from almost anywhere in the world, companies like Twitter are not going to choose the UK without a more competitive corporate tax rate as an incentive. Read our briefing on corporation tax from Tax Commissioner Anthony J. Evans for more.
Ed Balls rightly pointed out that the Coalition isn’t doing enough to create the conditions for growth in his speech to the Labour Party conference in Liverpool yesterday. However, his five-point plan for growth failed to meet the challenge he identified.
The shadow chancellor proposed five measures aimed at boosting growth. I’ve listed them below, along with what he should have suggested instead:
1. Repeat the Bankers’ Bonus Tax to pay for 25,000 subsidised homes.
High taxes solve no problems and are already deterring financial companies from remaining in the UK. A better solution would be to pass legislation preventing the Government from ever wasting taxpayers’ money on bailing out rotten financial institutions again. Meanwhile, a cut in Capital Gains Tax would do more to encourage more homes to be built.
2. Bring forward expenditure on major infrastructure projects to increase aggregate demand.
The problem isn’t a lack of demand. The problem is excess debt and misallocated resources. The solution to this problem isn’t in higher deficit spending, it’s in lower taxes and greater market discipline in the economy. A cut in Corporation Tax is the best way to encourage sensible investment in the economy.
3. Reassign home improvements and maintenance bills from the standard to the reduced (5 per cent) rate of VAT.
Lowering VAT is a laudable aim, but introducing new complexity by targeting specific types of goods will only add to distortions and compliance costs. A better tax cut in the housing market would be to abolish stamp duty. This would encourage people to move to where jobs are and stop taxes from getting in the way of the right homes going to the right owners as people’s circumstances change.
4. Reverse the VAT rise, taking it back to 17.5 per cent.
The shadow chancellor is right to point out that the Coalition were wrong to raise VAT, and he’s right to call for it to be reversed. But a better way to stimulate employment and help the poor would be to increase the personal allowance so that the poorest keep more of what they earn and aren’t penalised for working.
5. Provide a one year break from National Insurance for small firms taking on extra workers.
The Coalition have already attempted a similar scheme and the response has been very underwhelming. A one-off gimmick is not going to get people back into work. Better to cut National Insurance permanently and better still abolish it. Not just for small firms but all companies. We need jobs wherever they might be generated, not just from companies in politically popular sizes.
The 50p tax rate harms the poorest in society most. It can do so in two ways: their jobs may cease to exist or never be created; and because the poor end up paying a larger share of the total tax take. It is time for the Government to stand up for what is morally just and get rid of the 50p rate.
When you increase tax on the rich, they have less money to spend. So they cut back. What do they cut back on? They may reduce spending on luxury objects: not buy that painting or that antique chest. This is likely to be a minor change – their house may be full already. Or they may reduce spending on services. Restaurants may suffer in a minor way. Minor, because the rich still have to eat and typically do not have much time to cook for themselves.
Or perhaps they cut back on domestic staff: the window cleaner, the cleaner, the cook, the gardener. Precisely those jobs for which you do not need university degrees or a long CV. In other words: the jobs for the less well-off are the most likely to be dispensed with. Sometimes full national insurance paid jobs will be replaced by cash-in-hand jobs. Full time may become part-time – now entitling the cleaner to claim housing and other benefits. This is the trickle-down effect; so often derided, but a daily reality for those who have not many opportunities at the best of times.
A large number of studies have shown that if you cut tax for the highest earners, they end up paying a higher share of the total. The opposite is true, too: when you increase their taxes, the less well-of pay a higher share. This is because paying for tax experts who can find methods to avoid taxes becomes a more lucrative alternative than to pay the increased tax. In addition high earners (and companies) will flee – either in person, or with their capital. There is a lot of evidence that this is happening in the UK right now. Those who are no high earners therefore end up paying a larger share of the total tax take.
All this is made worse by the fact that the rate was introduced as a political measure. The fact there needs to be a review on whether it raises money demonstrates that there was no work done before its introduction to prove it would raise money. We need to say this loud and clear. Taxing high earners more does not make the rich suffer much: it’s the poor who end up poorer.