I’ve always been a great believer in the quote that “Those who do not learn from history are doomed to repeat it”. So when Alistair Darling brought in the 50p tax rate, I naturally assumed that he did not take on board the sentiments of George Santayana’s quote as history has told us time and time again that, "for a nation to try to tax itself into prosperity, is like a man standing in a bucket and trying to lift himself up by the handle.”
In the 1970s we suffered the brain drain, when the country’s biggest export was tax exiles and George Harrison was previously moved to write the song Taxman when he learned that his taxation rate would be 98%. One might argue that the 50p tax rate (although with National Insurance, this should actually be known as the 51p tax rate) is nowhere near as draconian as the tax rates of the 1970s or indeed the rates until 1988. However, what is different now is the options that are available to high earners to live elsewhere, without inconvenience, using the internet and much improved air travel.
This was brought home to me when at an event I attended in the City of London, I was told of a former London resident and UK taxpayer who earns £36 million a year, and who has decided to skip the 50p tax rate by taking up residency in Switzerland, thus denying us the £18 million tax take and an injection of up to £18 million of his after tax income into the economy.
And what of the economic case? We all know about the economic laws of diminishing returns and of demand and supply. It is my belief that these economic laws apply to the 50p tax rate.
When Nigel Lawson cut the top rate from 60p to 40p in 1988, the tax take rose and top earners actually paid a larger share of it. When the Treasury decided to set the rate of Capital Gains Tax at 28%, they stated that studies they had conducted concluded that this was the rate which maximised the tax take, I would suggest that if the optimum rate for unearned income is 28% then it is very unlikely that the optimum rate of income tax should be nearly double that level. Less than 1% of the population earn over £150,000 a year and these people contribute over 22% of total income tax. The emigration out of the UK of only a small minority of these people will have a major effect on the country’s tax take.
So there is neither a practical nor economic case for this tax band, and you don’t have to just take my word for it. Before its introduction, the Institute of Directors argued that a higher tax rate would damage business confidence, foreign investment and entrepreneurial aspiration, stating:
"We believe the 50p rate is likely to raise little or no tax overall in the short-term, and lead to lower overall tax revenues in the medium to long-term."
Patrick Stevens, a tax partner at the accountants Ernst & Young, said that while high earners who stayed in the UK would pay more tax, there would be fewer of them:
"They will either leave the UK or not come at all, undoubtedly fewer people are coming to the UK to make up for the normal leavers, so the population of those higher earners is going down."
Boris Johnson has warned:
"It's no secret that I think in the long run a 50p tax rate is not going to be competitive with our major rivals, they all have lower top rates of tax now than the UK. It can't go on forever, in my view."
So what is the case for a tax rate that will lead to decreased revenues? For the Labour Party, it was a pre-election attempt to convince their core vote that they were still the party of squeezing the rich and, at the same time, laying a bear trap for the Conservative Party election campaign. Fortunately, George Osborne seemed to recognise the damage this tax rate is having when he recently told The Spectator that the 50p rate was a "temporary feature of our tax system", but it was necessary to ensure a sense of "fairness" so that the "whole country feels that every part of society is making a contribution to the fiscal consolidation".
My concern is that we are slowly strangling the golden goose that is the 350,000 50p rate taxpayers and, by the time we get rid of it, the legacy it will leave will be another monument of Labour’s economic barbarism with fewer high earning taxpayers, reduced revenues and a higher burden of taxation for everyone. This is an economic tragedy in which the coalition Government, through its reluctance to grasp the political nettle, is now playing a major supporting role.
Although the 50p tax rate has been declared repeatedly “a temporary measure”, I am very concerned that the damage it is doing to our business and economic growth will be permanent. Wealth does not confer on those who are fortunate enough to be able to earn it an automatic entitlement to health, friends or happiness, but it does provide choices. The 50p tax rate affects those within our society with the highest level of choice and one of those choices is where they choose to be domiciled for tax purposes.
Once taken, the choice to leave our country or, in the case of foreign investors, not to come at all, will take more than a return to the former top rate of 40% tax to tempt them back. I would maintain that the imposition and continuation of the 50% top rate of income tax is for purely political reasons and amounts to nothing less than “slow motion economic suicide”.
April this year will be the first anniversary of the 50p tax rate and I hope, for the future economic prosperity of our country, it is also its last.