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A Tory government outbidding Labour on tax rises isn’t sensible economics – it’s just political posturing, writes director general of the Institute of Economic Affairs MARK LITTLEWOOD 

When Liz Truss‘s short-lived administration announced its intention to abolish the 45p top rate of tax in September, Labour’s deputy leader Angela Rayner made a solemn vow.

Under Labour, she declared, high earners would pay 45 per cent tax on earnings above £150,000.

Following the news that Rishi Sunak and his Chancellor, Jeremy Hunt, are mulling over a proposal to jack up that rate to 50 per cent, we find ourselves contemplating the extraordinary possibility of a Tory government outbidding the Left on tax rises.

It is scarcely believable that it is a Conservative administration, not a socialist one, that is considering squeezing the rich until the pips squeak.

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

It is scarcely believable that it is a Conservative administration, not a socialist one, that is considering squeezing the rich until the pips squeak It is scarcely believable that it is a Conservative administration, not a socialist one, that is considering squeezing the rich until the pips squeak

It is scarcely believable that it is a Conservative administration, not a socialist one, that is considering squeezing the rich until the pips squeak

Pledge

Imposing such a punitive rate on high earners is not sensible economics: it would be political posturing amounting to virtue signalling.

The aim can’t really be to boost tax revenue — the sums raised, in the scheme of things, would be negligible. It’s merely designed to make a show of punishing the better-off.

At the 2019 election, the Conservatives won a landslide majority on a manifesto that included a pledge not to increase taxes.

But now they are in government, they appear to be frustrated that taxes aren’t high enough — despite the fact that the tax burden is higher than at any time since Clement Attlee’s post-war socialist government.

A 50p rate is far higher than Ireland’s 40 per cent or New Zealand’s 38 per cent — neither of which has a reputation for being a haven for ultra-capitalists.

The Government ought to know very well that it is untrue to claim our burgeoning public expenditure can be funded by an assault on the 1.4 per cent of earners who breach the 45p threshold. So we can only assume that Downing Street advisers think a punitive 50p tax rate would play well at the polls — and put them in a position to rebuff claims that Rishi Sunak, himself extraordinarily wealthy, is in politics only to help ‘his rich friends in the City’, as the Left is so fond of claiming.

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

He must be aware that, on a national scale, tax rises for high earners not only have little value for the Treasury, but are often counter-productive. Conversely, tax cuts at the top end can reap more revenue.

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

He must be aware that, on a national scale, tax rises for high earners not only have little value for the Treasury, but are often counter-productive He must be aware that, on a national scale, tax rises for high earners not only have little value for the Treasury, but are often counter-productive

He must be aware that, on a national scale, tax rises for high earners not only have little value for the Treasury, but are often counter-productive

It’s so widely accepted that, earlier this year, the Institute for Fiscal Studies think tank — no one’s idea of a Right-wing organisation — agreed that abolishing the 45p top rate quite probably could cost the Treasury nothing at all.

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

This has never been more true than it is today. In the wake of the pandemic, many people feel there’s more to life than maximising their pre-tax salary. What’s the point of working five long days a week, many ask, if they never see their families?

Others begin to question whether it might be better to take longer holidays, play a bit more golf or spend longer in the garden. Maybe that means cutting their hours, or refusing a promotion, or taking early retirement.

And it’s much easier for them to make those decisions if the Government is grabbing an ever larger tranche of their income.

The result is that, as tax rates go up, government revenue can actually go down. During the dark days of Jim Callaghan’s Labour government at the end of the 1970s, there was much talk of the ‘brain drain’. The top tax rate was 83 per cent, with savings income for high earners taxed at 98 per cent.

Things were so bad that a significant number of top earners simply refused to carry on working or investing in Britain.

Newspaper cartoonists illustrated the ‘brain drain’ by drawing entrepreneurs and consultants boarding flights at Heathrow, never to return.

But it is now the middle-ranking earners on a top rate of 40 per cent, whose ambition and determination to work hard is being drained away.

During the dark days of Jim Callaghan’s Labour government at the end of the 1970s, there was much talk of the ‘brain drain’. The top tax rate was 83 per cent, with savings income for high earners taxed at 98 per cent During the dark days of Jim Callaghan’s Labour government at the end of the 1970s, there was much talk of the ‘brain drain’. The top tax rate was 83 per cent, with savings income for high earners taxed at 98 per cent

During the dark days of Jim Callaghan’s Labour government at the end of the 1970s, there was much talk of the ‘brain drain’. The top tax rate was 83 per cent, with savings income for high earners taxed at 98 per cent

Punitive

The 40p-in-the-pound rate was originally meant to apply to society’s biggest earners, the pop stars and City whizz kids. Now it takes great bites out of the income of doctors and senior nurses, department heads and middle managers: anyone earning just over £50,000 per year.

Not only is their incentive to get to the top being eroded by the punitive rate of tax they will have to pay on their increased earnings, they fear they’ll be the Treasury’s next target. While it’s unlikely that the 40p tax rate will be cranked up any time soon, the threshold at which it is introduced won’t rise either.

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

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

Instead, everything in the public sector is labelled an ‘absolute priority’.

If we want to maintain very high budgets for the NHS, something else has to give – but the welfare system, education, defence, the police and even HS2 all appear to be sacrosanct.

If everything is a priority, then nothing is… and so everything suffers.

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Growth

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

As interest rates soar, so do the repayments. The cost of servicing the national debt is already higher than the entire education budget, and — with interest rates set to rise further — that burden will only get heavier.

Merely making the minimum payment on the Government’s credit card each month could soon cost more than the whole of the NHS.

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

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

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

The idea that punishing the rich brings bonuses and benefits for all is a desperate fiction. And we will all pay the price for believing it.

MARK LITTLEWOOD is director general of the Institute of Economic Affairs.

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