Wednesday, 22 April 2009

Why 50%?

New Labour specifically promised not to raise the top rate of income tax in this parliament. The November announcement (of a 45% rate on earners of more then £150k) circumvented this by kicking in only in 2011, which must be after a general election. Now, however they have both increased and brought forward this rate rise (to 50% from April 2010). Why?

Reasons in favour:
1. Revenue. Increasing tax raises revenue (ignoring largely discredited Laffer theories about discouraging or scaring away high earners). However, even the Treasury only expects this tax to raise £2.4bn (compare to the budget DEFICIT of £175bn this year and next).
2. Symbol. There is a widespread feeling that the rich caused this crisis, and that whilst they may have lost more financially (stocks, housing and offshore banking having collapsed), they aren't the ones living hand-to-mouth as a result, and so it is very satisfying for the public to see the rich stung (especially since the personal allowance and base rate have both been made more generous for most people over the past couple of years). See "poorly targeted" in reasons against.
3. Angry mob. Related to symbol, this is a very effective way of drawing a little ire out of people's belief that politicians are representing the rich, and that everything possible must be done to punish both groups for this crisis.
4. Diversion. The deficit numbers are spectacular and so something must be done to draw attention away from the £350bn net public borrowing over the next 24 months. The Tories, to their credit, although entirely self-interestedly are focusing more on the deficit. It is my view that an 8-12% deficit was necessary this year and next, although I also feel that it should quickly return to surplus.
5. Putting the Tories on the spot. Not now, that is, but when they take over. How easy will it be for a Labour Shadow Chancellor to exclaim and fulminate about the Tories helping the few, the élite, at the expense of the many, whenever the next Chancellor tries to remove this tax (and try they will).

Reasons against:
1. Symbol. To those of means, this is a sign that Britain intends to tax them heavily for the forseeable future. Whislt taxes are rising everywhere, they are not equal everywhere, and this will encourage some rich people to shop around for a better country in which to live. They might even be heartily welcomed by countries desperate for their money.
2. Poorly targeted. Most of those who caused this crisis are no longer earning as much as they used to. Those still earning £150k work in countless fields, most of which have little to do with banking and many of which will be the same industries helping Britain (or any other economy) out of the recession.
3. Broken promise. Whilst Labour have (to me) a perfect force majeur defense for this charge, the Tories will use it to declaim any Labour election pledge.
4. It was proposed by the Lib Dems ages ago. Surely someone has pointed this out, but the Lib Dems had this in their manifesto for 2005, so surely the government is only acknowledging the superiority of the 3rd party.

Having said all of that, it was STILL the right thing to do. The symbol of hitting the rich (whilst not hitting them 85-98% as in the 70s) will help the party a lot, especially since it affects so few people (how likely are YOU to be earning £150k in the next 3 years?)

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