A Tory government overbidding Labor tax hikes is not smart economics, writes MARK LITTLEWOOD

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When the short-lived administration of Liz Truss announced plans to scrap the top tax rate of 45p in September, Labor deputy leader Angela Rayner made a solemn vow.

Under Labour, she said, top earners would pay 45 per cent tax on earnings over £150,000.

Following the news that Rishi Sunak and his chancellor, Jeremy Hunt, are considering a proposal to raise that rate to 50%, we find ourselves contemplating the extraordinary possibility of a Conservative government outbidding the left on hikes. of taxes.

It’s hard to believe this is a conservative, not socialist, administration that plans to squeeze the rich until the pips cringe.

With a recession looming, the last thing this country needs is a reintroduction of the 50p maximum rate.

It’s hard to believe this is a conservative, not socialist, administration planning to squeeze the rich until the pips creak

Pledge

Imposing such a punitive rate on high earners is not sensible economy: it would be a political posture equivalent to a signal of virtue.

The objective cannot really be to increase tax revenues — the sums raised, in the scheme of things, would be negligible. It is simply designed to pretend to punish the wealthy.

In the 2019 election, the Conservatives won an overwhelming majority on a manifesto that included a pledge not to raise taxes.

But now that they are in government, they seem frustrated that taxes are not high enough – despite the fact that the tax burden is higher than at any time since the post-war socialist government of Clement Attlee.

A rate of 50p is far higher than Ireland’s 40% or New Zealand’s 38% – neither has a reputation as a haven for ultra-capitalists.

The government should know very well that it is wrong to claim that our booming public spending can be financed by an assault on the 1.4% of wage earners who exceed the 45p threshold. We can therefore only assume that Downing Street advisers think a punitive 50p tax rate would play well in the polls – and put them in a position to refute claims that Rishi Sunak, himself extraordinarily wealthy, n he is in politics only to help “his rich friends in the City”, as the left likes to claim so much.

But pandering to Twitter activists is no way to design a sensible, long-term tax system. The Prime Minister should never allow the sneers of political enemies to influence his judgment.

He must be aware that nationally, tax hikes for high earners not only have little value for the treasury, but are often counterproductive. Conversely, tax cuts at the top end can generate more revenue.

This is not a controversial claim. It’s a basic economic principle, proven by an economist called Arthur Laffer, who drew a famous chart on the back of a napkin to help explain it to White House officials at a meeting in 1974 and who wrote about it in these pages a few weeks ago.

He must be aware that nationally, tax hikes for high earners not only have little value for the treasury, but are often counterproductive.

He must be aware that nationally, tax hikes for high earners not only have little value for the treasury, but are often counterproductive.

It is so widely accepted that earlier this year the Institute for Fiscal Studies think tank – no one gets a idea of ​​a right-wing organization – agreed that abolishing the 45p top rate could most likely cost nothing to the treasury.

The logic is simple and based on human nature. When people know they can keep more of their income, they strive to earn more. Rising tax rates, on the other hand, are a barrier to hard work and risk taking.

This has never been truer than today. In the wake of the pandemic, many people think life is about more than maximizing their pre-tax paycheck. What’s the point of working five long days a week, many wonder, if they never see their family?

Others start to wonder if it might be better to take a longer vacation, play a little more golf, or spend more time in the garden. This may mean reducing their working hours, refusing a promotion or retiring early.

And it’s much easier for them to make those decisions if the government grabs an ever larger slice of their income.

The result is that as tax rates increase, government revenue may actually decrease. During the dark days of Jim Callaghan’s Labor government in the late 1970s, there was much talk of “brain drain”. The top tax rate was 83%, with savings income for high earners being taxed at 98%.

Things were so bad that a significant number of high earners simply refused to continue working or investing in Britain.

Newspaper cartoonists illustrated the “brain drain” by drawing contractors and consultants boarding at Heathrow, never to return.

But it is now the middle-ranked employees with a maximum rate of 40%, whose ambition and determination to work hard are wearing thin.

During the dark days of Jim Callaghan's Labor government in the late 1970s, there was much talk of

During the dark days of Jim Callaghan’s Labor government in the late 1970s, there was much talk of “brain drain”. The top tax rate was 83%, with savings income for high earners being taxed at 98%.

Punitive

The rate of 40 pence in the pound was originally intended to apply to society’s biggest earners, the city’s pop stars and child prodigies. Now it takes a big chunk out of the income of chief doctors and nurses, department heads and middle managers: anyone earning just over £50,000 a year.

Not only is their incentive to reach the top being eroded by the punitive tax rate they will have to pay on their increased income, but they fear they will be the Treasury’s next target. While the 40p tax rate is unlikely to be increased anytime soon, the threshold at which it is introduced will not increase either.

If the threshold for tax increases does not keep pace with wage increases, more and more people will be pushed into the higher tax bracket each year. It is a stealth tax increase. On both sides of the House of Commons, MPs love to talk about making ‘tough choices’, but few, if any, have the courage to undertake them.

Nobody wants to admit that we don’t have the money to pay for everything.

Instead, everything in the public sector is branded a “top priority.”

If we’re going to keep NHS budgets sky-high, something else has to give – but the welfare system, education, defence, policing and even HS2 all seem to be sacrosanct.

If everything is priority, then nothing is… and therefore everything suffers.

Growth

The government is trying to justify breaking its tax promises by talking about a £60billion black hole in public finances. But the reality is incredibly worse. Britain’s overall national debt is in the trillions when other liabilities are taken into account.

As interest rates skyrocket, so do repayments. The cost of servicing the national debt is already higher than the entire education budget and, with interest rates set to rise further, this burden will only increase.

Just making the minimum payment on the government credit card each month could soon cost more than the entire NHS.

Our only hope of dealing with this crisis, reducing the debt and investing in our public services, is to fuel economic growth.

Only by making Britain’s businesses more successful and its hard workers better off will this be achieved, and benefiting the Treasury in the process.

Punishing our high earners is the worst possible policy. Rather than blaming them for their awards, we should celebrate all they do for Britain and encourage more people to invest here.

The idea that punishing the rich brings bonuses and benefits to everyone is hopeless fiction. And we will all pay the price to believe it.

  • MARK LITTLEWOOD is Managing Director of the Institute of Economic Affairs.
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