The top 50 per cent income tax rate in the UK will be temporary, the UK government says, but what are the chances that this tax will go?

The 50 per cent top rate of income tax in the UK has caused a stir in the political village lately with many commentators and players on the right calling for it to be axed.

When the UK reported disappointing growth figures of 0.2 per cent for the second quarter of 2011, Boris Johnson, the London mayor, argued publicly that abolishing the highest rate of tax could boost the sluggish economy. The UK finance minister, George Osborne of the Conservative Party, is allegedly willing to get rid of it, but when will it be politically possible to do it?  The Conservative-Liberal Democrat coalition, which took office last year, is trying to get to grips with the budget deficit by cutting public spending. And it has already spent political capital, for example on tripling university tuition fees.

“If the coalition gets to decide when the next election is, I would expect the Tories (the Conservatives) to abolish it in the run up to the election,” Dr Jon Davis, contemporary historian at Queen Mary University and former investment banker at JP Morgan, told this publication, hinting that the coalition could fall before the scheduled election in 2015.

“As far as I understand, the 50 per cent rate causes more political discomfort than it brings in in tax take,” Dr Davis said. “As the (Alistair) Campbell Diaries show, (Gordon) Brown always wanted it while (Tony) Blair ruled it out completely. I could see a New Labour leader making a big statement by campaigning against it.”

The top rate was introduced by Brown and the previous Labour-led administration shortly before the 2010 general election on those earning £150,000 (about $244,000) or more. At the time, some in the financial services industry warned it would drive some high earners abroad and deter such people from working in the UK. The then UK finance minister, Alistair Darling, indicated that the rate was temporary, an approach which Osborne has stuck to.  

Back To The Past?

Besides his academic duties, Dr Davis is executive director of the Mile End Group, a political history society headed by Lord Peter Hennessy, also from Queen Mary University and a cross-bencher in the UK’s upper house. Hennessy has taken the title Attlee Professor after Clement Attlee, the Labour prime minister between 1945 and 1951 who oversaw the creation of the welfare state.

“I can understand why it (the 50 per cent tax rate) was imposed, what with the tremendous deterioration in the public finances,” Dr Davis said. “But while I have no particular like or dislike of it, it feels somewhat like an anachronism, a throwback to an earlier age, when George Best and Bobby Moore were plying their trade," referring to the famous footballers.

The highest rate of income tax was actually way higher in Best’s and Moore’s heyday and especially slightly after in the mid-70s when it hit 83 per cent while the tax on high levels of investment was 98 per cent. The UK finance minister at the time, Denis Healey, Labour, said the rates were “ridiculous” when being interviewed by the BBC in 2006. The top rate then stood at 60 per cent for most of the 1980s, the Thatcher era often remembered as the high tide of neo-liberalism, and was cut to 40 per cent towards the end of the decade.

Dr Eamonn Butler of the Adam Smith Institute, a free market thinktank taking its name from the “father” of modern economics, believes that the tax could go much earlier than the next election: “The UK government is currently examining the impact of the 50 per cent rate on revenues and if, as is likely, the evidence shows that it harms, rather than benefits, then Osborne could scrap the rate in his budget statement next spring,” he told Wealthbriefing.

“I am against it because all the evidence from countries around the world is that a tax rate above 40 per cent does not work," he said, arguing that rates over 40 per cent tend to bring in less revenues, because of tax avoidance behaviours, emigration and less wealth creation.

“We’re not alone in this…”

Dominic O'Connell, head of tax, trust and estate planning at Coutts, the UK private bank, said that most of his clients have been “philosophical” about the tax rate in 2010: “They understand the world situation,” he told this publication. “And we’re not alone in this. Most countries have had to raise taxes, and the way to do it is often to tax the sector of the population with the greatest ability to pay.”  

“Many commentators also tend to forget that is a marginal tax so people only pay 50 per cent on income above £150,000 and lower rates of tax on the income below that,” O’Connell said.

”I would be surprised if it would go anytime soon,” O’Connell continued. “It’s only been in place since April 2010 and it will take until January 2012 until the entire first year take from the new tax is due to be paid. People cannot say that it has been counterproductive on a factual basis; it’s more based on the historical backdrop. I would be surprised if it is still in place after the next election, but it is possible.”

Matthew Elliott, chief executive of the TaxPayers’ Alliance, a pressure group campaigning for lower taxes, thinks the tax rate could go as soon as this autumn: “It is becoming increasingly clear that the 50 per cent top rate of tax is likely to be abolished,” he told Wealthbriefing. “The case for keeping the tax is political posturing; it’s about appearing to make the wealthy pay more at a time of austerity, regardless of the economic case behind it. Abolishing the rate will cause a political stir and will take some fraught negations within the coalition, but there are indications that conference season (September and October) would be a popular time to announce the end to the 50 per cent tax rate.”

Unsurprisingly, Elliot is not himself a fan of the top rate: “The tax fails the most basic of tests that any tax rate should pass, it doesn’t increase government revenue,” he said. “Analysts and policy makers within the treasury are becoming increasingly convinced that top rate of tax loses as much money as it raises. Cutting it would signal that Britain is open for business and it would cement London’s position as the centre of global finance.”

Crowded in cloud cuckoo land?

One hurdle on the way to a lower top rate is the Conservatives’ junior coalition partner, the Liberal Democrats, which is likely to fight against the tax cut tooth and nail, especially as it lost a referendum on electoral reform in May. The number two in the UK finance department, Danny Alexander from the “Lib Dems”, went on live television and said that anyone who believed that tax cuts for the wealthy was a priority lived in "cloud cuckoo land". Vince Cable, the UK business secretary of the same party, has said that if scrapped it would have to be replaced by another tax that would deliver fairness.

The richest 1 per cent of adults are affected by the tax, according to research by the Institute of Fiscal Studies, an economic research association, carried out in February last year. The institute thought that the new tax would mean that the rich would shrink their taxable income and cut their consumption, and that it would raise £1 billion extra a year instead of the £2.4 billion it planned. However, other analyses have concluded that it has brought in about what was expected, and there is no evidence that any mass exodus from the City of London took place.

According to reports across the UK media, Treasury figures show that the 70 per cent of the revenue would still be collected if the top rate was cut by 5 per cent.