Cutting the top rate of tax won’t help Britain win ‘the global race’

It's not clear how cutting the 45p tax rate to 40p, as suggested by Lib Dem MP Jeremy Browne, would benefit Britain, writes Tony Dolphin.

It’s not clear how cutting the 45p tax rate to 40p, as suggested by Lib Dem MP Jeremy Browne, would benefit Britain, writes Tony Dolphin

In an article in the Independent today – ahead of the publication of his new book, Race Plan – the former Lib Dem minister Jeremy Browne calls for the top rate of income tax on earnings over £150,000 to be cut from 45p to 40p, claiming this would help Britain win the “global race”.

There are a number of objections to this proposal.

First, the whole concept of a ‘global race’ is misleading. It suggests there have to be winners and losers among nations, or that Britain is striving to climb its way up some global growth equivalent of the Premier League table.

This is wrong.

It is quite possible, with the right policies, for growth to be lifted across the globe. If Britain grows faster, it does not mean that somewhere else has to grow more slowly. If Britain increases its exports, it need not be at the expense of another country’s exports; it can be because world trade is increasing more rapidly.

All countries should strive for a level of output – and a growth rate – in line with their potential. They should also seek to maximise that potential. If a sporting analogy must be used, think not of a global race but of a person seeking to improve their personal fitness.

Second, there is no good evidence to support the idea that wealthy people will work harder if their tax rate is cut from 45p to 40p. Many people, even on such high incomes, have little choice over their terms and conditions of work. People in that small proportion of the population that earns over £150,000 are motivated by a range of factors to get up and work each day.

Third, the argument that cutting the top tax rate from 45p to 40p (or even from 50p to 45p as the coalition has already done) will lead to an increase in revenues because people will work harder or seek less actively to avoid tax is unproven. It is based, in part, on evidence from the 1980s when the top rate of tax was first cut to 40p – but our economy has changed a lot since then and the relevance of this evidence is questionable.

Meanwhile, the fact that revenues appear to have increased following the cut to 45p tells us very little. Because the cut was announced in advance, there was a huge incentive for high earners to defer their income. It will be several years before we know whether the cut has led to an increase in revenues.

Browne ends his article by saying “Britain needs a race plan”. It does not. It needs a plan for economic reform that will mop up the spare resources in the economy, nudge up its potential growth rate (be suspicious of any plan that promises a dramatic improvement), deliver better balanced growth and ensure that increases in prosperity are shared more equally than has been the case for most of the last 35 years.

It’s not clear why cutting the 45p tax rate to 40p need be part of that plan.

Tony Dolphin is chief economist at IPPR

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6 Responses to “Cutting the top rate of tax won’t help Britain win ‘the global race’”

  1. martintheaccountant

    Oh dear. If only tax law and human nature was as simple as Mr Dolphin would like!

    Tax law – corporate, transactional , social and personal – and human nature are much more complicated and a lot less rational that Mr Dolphin’s analysis assumes.

    At its crudest level, consider personal tax. The tax yield Y equals a notional tax rate T multiplied by the taxable base B. Unfortunately, B is a function of T. The movement is fuzzy, because the *perception* of future T is as important as the fact of the current T. And the expected result is in an inverse relationship: as T rises, then B falls; as T falls, then *provided other comparable tax jurisdictions remain unchanged* B *might* rise. The perception of future T represents the extent to which an international taxpayer is prepared to trust a government.

    The issue isn’t whether a taxpayer will work harder when they are taxed *more* by *lower* marginal rates (although it’s nice work if one’s government can get away with it). The issue is whether a taxpayer is prepared to live in a particular taxing jurisdiction at all. The choice that governments face is “all or nothing”.

    If it’s better value for the taxpayer to pay a fortune in tax advice and then move house to the other side of the planet, then that’s what the taxpayer is likely to do. Some are even prepared to live on a boat for a few years so that they fall out of tax nets altogether.

    And as most UK public services are either poorly delivered (e.g. maintenance of the road network; land law, planning law), or subject to means testing (e.g. most welfare benefits) or subject to other countries’ co-operation (e.g. defence, NATO, nuclear weapons), or a deadweight overhead that adds zero value to anything (e.g. payments to the European Union), convincing any taxpayer that UK tax is worth paying is likely harder than nailing jelly to the ceiling.

  2. Libertarian Revolution

    Why should anyone work beyond what they just need for themselves, if the State is going to steal the fruit of their labour?

    In a globalised world, why should any of us care about whether Britain wins or fails? The “State” is an abstract concept – surely all we should care about is whether we, as individuals, win or fail?

    From an individual perspective, perhaps, it is in our interest for the State to fail? I can see only upside to less public sector workers and a far smaller State.

    Why should those who endeavour be forced to leave Britain just to avoid the punitive tax rates imposed by the State?

    Perhaps, those who resent such theft should focus on persuading foreign business to go elsewhere, on international lenders to shun UK debt, and for the wealthy to move abroad, or to at least take a sabbatical? UK public finances are precarious – should not take much to push it over the edge.

    Why should the tax rate be 40p? Why should it not be 10p? Why should we not have a flat rate? Why should the State not be limited by a clear Constitution as to what it can tax, and the rate at which it can tax – and be forced to live within that constraint?

    If there is no money – then there is no military, no benefits to the lazy, and no political expense scandals. A “Greek solution” has its attractions.

    From a ethical perspective, what gives IPPR or “Left Foot Forward” the right to impose their views on anyone else? Why should we accept the “democratic” right of the mob to steal what we have worked for?

    Let us work towards the collapse of the British State – it should not be too hard to achieve.

  3. blarg1987

    To turn the argument on its head for a second here, your success is partially based on the services that the society provides you, (health, education, infastrucutre, defence etc). In the UK we all pay a fee to the state for the use of those services by taxation.

    Even in a zero tax economy you would still need to pay these fees to use those services be it pay as you go or an insurence based system.

    The question that has not ne answered however is in such societys where that type of system exists, is the overall cost as a percentage of income, greater, equal to or less then the system we have here for the same type of service?

    Only then can we really have an informed debate to decide whether a lower tax / more personnal payement system is a better alternative system to the current set up we have.

  4. frank100

    Thank you for putting your ideas so clearly, they just serve to demonstrate an astounding level of selfish self centredness.

  5. Graham Keeton

    who cares if we win or dont win the “global race” this is the problem with our govt always striving to be at the top its just so wrong and its about power , money and fame AND until those attitudes have gone THEN THERE WILL BE NO REAL CHANGE simple as that

  6. robertcp

    I accept that a top tax rate of 70-80% could have some impact on incentives but not 45-50%. We are in a much more unequal society than 30 years ago and it is only fair that the rich should pay their fair share, particularly when we are in such difficult economic circumstances.

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