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The speech from Ed Balls to the Fabian Society this morning was supposed to strengthen Labour’s credibility on the budget deficit. It stressed that Labour would pledge to balance the budget by 2020. We are told a Labour Government would face up to the tough choices of the tax increases or spending cuts required.

However, Mr Balls has also announced a tax increase that would reduce tax revenue. He says the 50p tax rate for those earning over £150,000 would be reinstated. There was a report(£) in the Sunday Times in November that the richest one per cent of us – the 300,000 people earning over £160,000 a year – contribute 30 per cent of all the income tax revenue. In 1979 the richest one per cent contributed 11 per cent of tax revenue – although the income tax rate they paid, 83 per cent, was much higher.

How much extra tax will the rich be paying this financial year 2013-14 with the 45p tax rate, than they paid the previous year when they paid 50p? We won’t know until the financial year is over but a monthly tally suggests a matter of billions. In the first month alone it was £1.3bn.The Spectator have produced a graph showing how the share of income tax paid by the rich has increased since the 50p rate was abolished.

Some of this will have been achieved by delaying bonuses until this financial year – but that does rather confirm that tax rates have an impact on behaviour. There is also the wider impact on economic growth and thus Treasury revenues. If a rich man decides to earn less money – or move abroad that has implications not just for the amount of tax he pays but also of the amount of money he spends and the number of people he employs.

President John F Kennedy said:

It is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now…The purpose of cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus…

JFK cut tax rates and increased tax revenue. After Dan Quayle’s experience, George Osborne may wish to avoid comparing himself to JFK – but in this regard at least such a comparison would be valid.

There may well be people who argue that a tax hike for the rich is the right thing to do on egalitarian grounds. That class war rhetoric has considerable popular appeal. Fair enough. But in that case Mr Balls should explain how he will finance his proposed tax increase. Will it be with further spending cuts? Extra borrowing? Or will he look for other tax increases that do raise revenue to offset the impact of one that cuts revenue?

74 comments for: Labour would reinstate the 50p income tax rate – how would they fund the tax rise?

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