Merryn's Blog

The 50% tax rate is unfair – and it won't solve our budget problems

If the rich feel the tax system is unfair, they'll find ways to avoid paying. And when the rich don't pay their taxes, the poor end up paying more.

You probably don't care that, thanks to the new 50% tax for those earning £150,000 plus, and to the scam that is National Insurance, more than 50% of the bonuses paid out to bankers this year will be paid directly to the taxman.

Instead you are probably just livid that anyone is getting a bonus at all, given the fact that the banks are still more or less insolvent and the fact that you can't get either a mortgage or a real return on your savings account. I am too. Why should they get £7bn in cash when we can't even find a way to maintain the purchasing power of our meagre pension pots?

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But here's the thing: how much is paid in bonuses and the extent to which they should be paid is a totally different matter, one for the banking industry to work out with the government and, if it can find one, its conscience. The point here is that high earners of all kinds are paying more than half of what they earn above £150,000 to the taxman.

This isn't just about bankers. It is about 129 council chief executives, thousands of entrepreneurs, doctors, Jeremy Clarkson, lawyers, celebrity hairdressers and even very popular personal trainers. So we have to ask ourselves not whether we want to punish the banks (sure we do, if we can find a way of doing it that does not hurt us too) but whether we want to hurt other high earners too.

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The 50% rate matters. It matters because 50% is a major psychological barrier for workers. Below it they feel like they get to keep the majority of the money they work to earn. Above it and they know they do not. Think of small children. When they share they are fine with keeping more than 50% for themselves and fine with "one for me, one for you." But make it "one for me, a bit of one for you" and they go nuts with the anguished yells of "it's not fair" (which it isn't).

The same tends to go for high earners. When they think things aren't fair, they work to keep as much of their income as possible below the highest threshold or out of the tax net. Back in the days when the highest marginal rate was not far off 100%, the children of most of the would-be highly paid were educated via "scholarships" handed out by their parents' employers for example. They might not get away with that one again (too obvious) but they'll think of others. They also work to turn income into capital gains. Finally, while not nearly as often as they threaten to, they do move abroad. Remember the brain drain? It was purely tax driven.

You can read about the various studies that suggest the higher the tax rate for the rich, the lower the tax take here: Why Cameron should ditch the 50p tax rate. All this matters because, however much we would all like to think that putting up taxes for the rich will solve all our fiscal problems, the global evidence suggests that it will not. And if high earners aren't paying tax, one way or another the rest of us will have to make up the difference. When taxing the rich doesn't work, governments end up taxing the poor.

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