Sympathy for the 50% taxpayers? 100% no

Columnist

Saturday 17 March 2012

Thanks to the havoc being inflicted by unemployment, it's hard to give a precise figure in any given month for the number of people paying income tax in Britain.

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Ian Bell

Over 31 million is a safe enough estimate in a population of, roughly, 49m adults.

Of these 31m, HMRC estimates that 3.74m are liable for the 40% tax band. Beyond that, 308,000 are believed to suffer the indignity of the 50% rate. It's not a lot of people. Yesterday, nevertheless, the leading lights of Her Majesty's Government spent a good deal of time discussing the hardships faced by the 308,000, not the 31m.

It has become a big issue for George Osborne, the Chancellor, and his Coalition partners as preparations for next week's Budget are concluded. Any business group with members liable to pay 50% on incomes above £150,000 has deemed the scrapping of the rate essential to Britain's wellbeing. Tory back-benchers and right-wing think-tanks have joined the chorus. They talk of little else.Variously, the tax is said to be holding back a recovery, discouraging entrepreneurship, driving the rich from Britain, encouraging tax avoidance and raising little – by some estimates nothing at all – by way of additional revenue. It is also putting the Coalition under a bit of strain.Mr Osborne dislikes the 50% rate as a matter – if this is the word – of principle. Having already swallowed so much that looks and tastes of Tory, the Liberal Democrats, on the other hand, are terrified of the consequences of a tax cut for the rich when real wages are falling, unemployment is rising, child benefit and other welfare cuts are on the way and the population is struggling with VAT at 20%. You can see why the LibDems might be worried.How, though, can there be a case for saying that the 50% rate has failed when 3.74m are obliged to cope, one way or another, with 40%? Those who oppose the higher rate like to point out, for example, that Britain's richest 1% already contribute 25% of all income tax. You could conclude from this that they already give their share. You could also conclude that the earnings in question must be vast, stratospherically beyond any common mean or median.When Labour introduced the band in 2010, the Treasury estimated that £2.5 billion in additional revenue would be raised annually. In January of this year it was revealed that income tax receipts of £153bn for 2010-11 had indeed set a new record, despite rising unemployment. One way or another, the amount paid by all taxpayers (in all forms of tax) had increased by 10%.When the self-assessment exercise for 2011 was completed at the end of January, however, it appeared that income tax from that source had suddenly fallen short by £500m. The 308,000 had been taking steps, it was reported, to "minimise their liabilities". Those opposed to the 50% rate took this as proof of their arguments.They expect confirmation when Mr Osborne reveals the findings of a study he commissioned into the effectiveness of the tax. This has taken an inordinate amount of time to complete, but will reportedly be ready, strangely enough, just in time for the Budget. According to the leaks that are now a traditional part of the ritual, the study will show that, rather than gathering in £2.5bn, the 50% rate has raised "only hundreds of millions".So here we pause. Mr Osborne is supposed to scrap a tax on the very wealthy because it is "only" raising hundreds of millions? There's a better question. If all the leaks are right, why has the take from this wicked impost fallen so short? Are there handy lessons for the rest of us?Not really. Not unless you can "change your form of remuneration" by giving yourself a thumping bonus or a huge dividend. Not unless you can throw a few more millions into your pension (Mr Osborne having restored top-end credits). Not unless you can convert income into capital gains, turn yourself into a company, engage in some serious tax avoidance, or quit the country.These devices are not illegal. Their existence encourages the likes of the Institute for Fiscal Studies to conclude in a recent report that it is a waste of time – I'm paraphrasing slightly – to attempt to take more tax from the very rich than the very rich are willing to pay. The institute quotes a further study that purports to have identified the "revenue maximising rate" for tax, above which a sane government must not go. By a remarkable coincidence, it turns out to be 40%.Consider those legal devices, however. If a rich person would go to such ends to circumvent the 50% band, why wouldn't he or she apply some of the same ingenious methods to 40%? The benefits would not be so conspicuous. Some of the devices would effect no saving. But still: where there's a will ...Plainly, the will exists in abundance. Top earners in Britain have done fantastically well since Nigel Lawson was Margaret Thatcher's Chancellor and inaugurated the tax-cutting mania. Ever-widening inequalities in wealth and incomes are proof positive. The rich have become very much richer. Now, when the country is in dire straits – as Mr Osborne never tires of saying – they dodge. Furthermore, they demand the right to dodge. For the country's sake.If the Chancellor is tempted to abandon the 50% rate now that is presumably because he wants to get the scandal over with well before an election. His hopes of tax cuts for everyone in advance of that event have long been abandoned, after all. Where the public finances are concerned, austerity isn't working. For the average taxpayer, the prospect ahead is pain and more pain. But are the LibDems truly stupid enough to stick with this suicide pact?Such is the burden of every leak. Yesterday's meetings between Mr Osborne, David Cameron, Nick Clegg and Danny Alexander were being held, reportedly, to finalise details of the Budget before its contents were despatched to the Office for Budget Responsibility. What remains to be seen is whether the LibDem pair have secured anything in exchange for their agreement.You can take your pick. A mansion tax on properties worth more than £2m? A new council tax band to cover the biggest residences? The scrapping of pension tax for very high earners? A compensatory raising of income tax thresholds towards £10,000 to aid the less well paid?Only the last of these would fail to take money from the rich. If the others posed a threat to their wealth, they would raise precisely the complaints – a crushing of the entrepreunerial spirit and the rest – as they have raised against the 50p rate. The self-interested argument would remain. Raising the personal tax threshold at the bottom would meanwhile be welcome to many, but it would do nothing – as Mr Clegg always forgets to say – to help the very poorest, the people who don't even earn enough to pay tax.No-one's thinking about them. There are 308,000 people with louder voices than the rest, and the ability to bend a government to their will. They can pay, and they won't pay. Only 39,000 of them have taxable incomes above £500,000. HMRC doesn't say how many are in the financial sector.

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Sympathy for the 50% taxpayers? 100% no

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