Income tax rate: Balls takes the gloves off

Ed Balls’ announcement that Labour will restore the 50p rate on those earning more than £150,000 is a “politically savvy manoeuvre”, but it is wrong economically, says The Independent on Sunday.

True, raising taxes on the rich is electorally popular: 60% of voters support it, according to a Survation/Mail on Sunday poll. But the reason the government reduced the top rate from 50% to 45% in 2012 was that, according to HMRC figures, the yield was “almost statistically insignificant”.

This view is supported by the Institute of Fiscal Studies (IFS), which says “the best evidence we have still suggests that raising the top rate of tax would raise little revenue and make, at best, a marginal contribution to reducing the budget deficit”.

The IFS also points out that Labour’s claim – that those paying 50p income tax paid around £10bn more over three years from its introduction in 2010 – was based on projections rather than final numbers.

Then there’s the fact that tax revenues have increased since the 50p rate was dropped, says Boris Johnson in The Daily Telegraph. The top 1% earn 13% of income, but pay a “record 30% of all income tax”. This is “a classic example of what economists call the Laffer curve”: a cut in rates producing more revenue.

But Balls would rather have “the exquisite pleasure of seeming to stick it to rich people than stimulate the growth and investment that actually produces more taxation”.

One of the reasons for this is that he has no experience of business or how the economy works.

Neither he nor Ed Miliband understand that our economy and society, “our ability to pay for the poorest and neediest – depends entirely on the willingness of a relatively small number of people to put in the back-breaking hours that will create the companies and drive the innovation that will employ the people whose payrolls yield the taxes that pay for the whole damn caboodle”.

Nonsense, says Polly Toynbee in The Guardian. The yelps of protest – including those from the 24 captains of industry who wrote to The Daily Telegraph claiming the tax rise will “have the effect of discouraging business investment in Britain” and put the “recovery at risk” – are simply the “shriek of self-interest dressed up as national interest”.

The gap between the rich and the poor is growing. Do we want Britain to “grow ever more socially unjust”?

We don’t, but crushing entrepreneurs and damaging the public finances by raising taxes is hardly the answer, says Allister Heath in The Daily Telegraph. True, we have a complex and broken tax system and the “status quo” may not be right, but that does not justify a tax rise “rooted in envy and pseudo-egalitarianism”.

The best way to unleash entrepreneurial spirit, nurture talent and retain capital is the reverse: lower taxes for all.

• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

MoneyWeek magazine

Latest issue:

Magazine cover
Heading higher?

Or are house prices set to fall?

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

'Would you rather upset God, or have Him just ignore you?'

In the first of three interviews with Merryn Somerset Webb, Hugh Hendry, manager of the Eclectica Fund, talks about what it takes to be a good hedge fund manager – and how he learned to stop worrying and love central banks.

Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.

24 November 1972: the 'DB Cooper' hijacking

Today in 1972, a man calling himself Dan Cooper parachuted from a hijacked Northwest Airlines Boeing 727 with $200,000 in cash. He has never been found.