It's squeaky pip time
28 Apr 09
Taxing the rich has long been a rallying cry for Old Labour, but will next year’s 50p top rate of income tax actually raise any more cash for the beleaguered Treasury?
Former Labour Chancellor Denis Healey never said that he would “tax the rich until the pips squeak” (his original quote was aimed specifically at “property speculators” not the wealthy in general), but the phrase became a mantra of Old Labour.
You won’t catch the current Chancellor Alistair Darling repeating the infamous threat, but by imposing a 50 per cent income tax hike for those earning above £150,000, starting in April next year, he was signalling that old-fashioned class politics is far from dead.
I can see the appeal of this to voters who are themselves being asked to bear a considerable degree of pain, because of the miscalculations of people who earn much more than the average salary. Also, I am not totally convinced by the argument that taxing “wealth creators” threatens our prospects for recovery. If a handful of investment bankers and Russian oligarchs decide that the climate in Monaco might suit their wallets better, I think we’ll find a way to muddle along without them.
The problem, however, it that there is a serious question mark over whether the 50 per cent rate will actually raise any more money for the public purse. Even HM Treasury apparently estimates that, while new tax rate and restriction on relief for pensions would, on paper, raise £7 billion, it is actually more likely to raise only £2.4 billion because rich taxpayers will adjust their behaviour.
The rich have far more options than the average taxpayer to reduce their overall liabilities: they are generally more mobile, they can adjust their spending habits and they can take a variety of steps to reduce their effective rate of tax.
The Institute for Fiscal Studies, in a study published just before last week’s Budget (Will income tax changes for the very rich raise any money? By Mike Brewer and James Brown) has also suggested that higher income tax for the rich reduces the Governments take in terms of indirect taxes.
The IFS says: “People can reduce their taxable income in a number of ways, including by working less, contributing more to a tax-free private pension or converting earnings into capital gains or corporate income that are taxed at lower rates. Higher tax rates might also lead to higher net migration or earlier retirement… it may well be impossible to raise the population on the very highest level of incomes above £150k, simply by raising the income tax rates applied to incomes above that level.”
So fiscally it doesn’t make sense. But in terms of justifying the pain that the majority of the population will be living with for some time, perhaps it’s worthwhile simply to “encourage the others”.
At least it will keep tax accountants gainfully employed for the next few years.