Merryn's Blog

A pointless, predatory tax that will do nobody any good

Raising the top rate of income tax to 50p is a sure fire way of collecting less money overall, says Merryn Somerset Webb.

What do you think the fifth most read piece on the personal finance part of the FT website is? The obvious answer is to think that it will relate to some kind of recent news perhaps platform charging or how to protect your portfolio from tapering turmoil.

It isn't. It is an article written by Lucy Warwick-Ching back in 2012 on the ten ways in which HMRC can tell if you are cheating on your taxes. And it isn't just on the most-read list now, it's been on the list since it was written.

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What this tells me is that the people who read the FT think they pay too much tax, and that they are either trying to avoid or evade as much as they can, or they are wondering if they might give it a go. If I was in charge of the country, that in itself would be enough to make me think that I wouldn't want to raise tax rates at all. Ever.

Better, I would think, to take in as much as I can at lower rates than battle rising evasion/avoidance at higher rates. But I'm not Ed Balls or Ed Miliband, and I am not engaged in an ideological battle against anyone I perceive as rich or over-aspirational.

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The idea of returning the top rate to a level that even Labour called temporary' when it was first introduced smacks, as Lord Myners put it, of "predatory taxation", and I can't really see the point of that.

One important thing to note on this argument and one that appears to be wilfully ignored by everyone is that no one's income is static. It might be that at any one moment only 1% of the population are earing £150,000 plus. But over a career, that number is much, much higher. I can't find figures on this in the UK, but for a hint we can turn to the US.

Some 2% of people are earning $250,000 at any one time. But ten times that number 20% earn the equivalent of $250,000 at some point in their career. The point is that the 1% is not actually 1% at all. This kind of penalty affects a huge range of people at the top of their game and on the way to the top of their game.

And let's not forget that direct tax rates in the UK are already pretty high. There is no such thing as a 45% marginal rate. Everyone pays another 2% in NI at that level, so the minimum you can call our top rate is 47%. You can then argue that employers, National Insurance (a cost which employees effectively end up paying by being forced to accept lower wages) is actually an income tax too. Look at it like that, and the top rate of tax is already far more than 50% already. Not too low, but too high.

It is also worth noting that back in 1979 the top 1% of income earners paid 13% of all our income tax at a time when the top rate was 83%. Today the top 1% of income earners (not wealth holders but income earners the difference is important) already pay not far off 30% of all UK income tax despite earning less than 14% of all income.

The arguments about whether higher taxes bring higher revenues will run and run, but my final statistic on this comes from the Sunday Times. In 2012-13, when the 50p rate was in place, HMRC raised £41.6bn from it. This year, with 45p as the top rate, it is to raise £49.3bn.

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That should make those who support a rise wonder if demanding it is a good idea one that will encourage wealth creation, innovation and entrepreneurial energy or just a sure fire way of raising less tax revenue overall.




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