The curious poverty of thought on the left over the 50p income tax rate

Posted by Christie Malry on September 7, 2011 at 11:04 pm

Today's FT carried a letter from 20 leading economists, in which they called for the 50p income tax rate to be scrapped in order to boost growth. Unlike the usual ragbag of retards who sign round robin letters like these, this was a high-powered group, including two former members of the Monetary Policy Committee (Julius and Wadhwani) and Bob Rowthorn 1 of Cambridge University (King's College too... normally a left wing hothouse). And, as you might expect, the left wing commenterati went into a tailspin as they responded to it.

Let's start with Owen Jones, who seems compelled to find the most dribbling position on any issue you care to mention. On this, he shrieks in Labour List that 50p simply isn't enough:

Let’s not simply defend the 50p tax band. Instead, let’s push for it either to be increased to 60p, or to take the threshold down from the current £150,000 to £100,000. In a country where if you earn £21,000, you are bang in the middle, decreasing the threshold would still only affect the very wealthiest – the top 2%, to be precise.

Either move would be popular with a public that wants to see the rich paying more. A poll last year revealed that 54% (against 29% who disagreed) wanted the top rate of tax increased to 60p in the pound.

Note that Jones doesn't even consider the economic impact of his proposals. Who cares if it raises less money than under the current income tax bands and could therefore lead to more savage, deeper spending cuts? We're stiffing it to the rich, and it's popular, innit! True, politicians have consistently demonstrated that they're not very good at economics and can't really be trusted with the economy, but that's hardly good cause to do simply what the public wants. They're even less informed and capable than politicians.

He continues:

At a time when working Britons, the unemployed and the poor face being hammered by cuts and – in the case of VAT, higher taxes – the case for the rich to pay more is unanswerable. It is popular and it makes economic sense.

Well, we don't know whether it makes economic sense yet, because the evidence isn't yet available. Would Jones be as sanguine if it were demonstrable that the 50p rate has reduced the overall income tax take or appeared to be harming future job creation?

Next up is Tim Farron, a Lib Dem. He said cutting the rate would be:

phenomenally immoral and send an appalling message to the overwhelming majority of hard-working people in this country.

'Immoral' to take any less than half of the earned income of those on, in international terms, modest high incomes? I've touched before on the topic of what is the 'right' amount of tax, and it's a question that has also troubled perennial thinker and blogger (and occasional Ritchie-worrier) Frances Coppola. But I simply don't believe Farron when he says that incomes over £150,000 must be taxed at 50% or more in order to be moral. He's just yet another Lib Dem tosser playing to the gallery. And he makes no reference to whether the 50% rate is revenue positive (like Jones, it's all about beating up the rich); if it loses revenue then his comments are even more bonkers.

But on this issue, like so many, pole position shall forever belong to wor Ritchie.

Nor is the virtue of growth per se outlined. There is even no evidence given that the government has put growth at the top of its agenda since its actions strongly suggest otherwise, but let’s move on. 

No, let's not. This is classic Ritchie. He blogs incessantly about what the government should do in order to promote growth (eg here, here, here) and criticises Osborne for pursuing policies which he believes won't deliver growth. He even does so in this sentence, by saying that the government's actions suggest they don't really want growth. So how can he legitimately call for these esteemed economists to prove that growth is the right course of action? He's bonkers.

This is a) a marginal tax rate not applied to all income b) not applied to much income derived by ‘talented’ foreign individuals coming to the UK for less than seven years because of the domicile rule and c) I’m told highly avoidable because the same group say almost no one is actually paying this sum. So where’s the ‘punishment?’ Is it so hard if you’re in the top 1% of income earners to make a contribution to the society that gave you that opportunity to profit, enormously?

 

And where is the squeal of protest from the same group of economists about the poorest 10% in the UK having higher overall tax rates than the group with which they are concerned here?

Well, they do say it's a marginal rate, so it seems a bit churlish to criticise them for it being a marginal rate. The 50p tax rate applies to all income earned here by talented foreign individuals coming to the UK, no matter how long they stay here. The domicile rule has no effect whatsoever on income earned in this country, no matter what left wing commentators would have you believe.

And what's this? Almost no one is actually paying this sum? Doesn't that concede the point that the tax isn't very effective? So why is it so critical to retain it?

The top 1% of income earners already do make a huge contribution to this society. The top 1% of earners pay 27.7% 2 of all income tax, and income tax is the single most significant source of tax revenue. How much more would they be paying in an ideal world - all of it?

The poorest 10% don't have higher overall tax rates than the top 1%. The Office for National Statistics publishes an excellent publication entitled The effects of taxes and benefits on household income, which provides handy tables on incomes and tax payments by decile and quintile. It shows that the poorest quintile pays direct taxes at a rate of 10.2%, the richest quintile at  24.4% 3. Perhaps he means all taxes? OK, the poorest decile pays £1,113 of direct taxes and £2,906 of indirect taxes on a gross income of  £9,275 4, equivalent to a (very steep) effective overall rate of 43%. The equivalent figures for the richest decile are £25,719 and £8,442 on gross income of £101,808, equivalent to an effective overall rate of 25%. However, the poorest decile's income includes cash benefits of £5,388, while the richest decile's income includes cash benefits of just £1,653 (mostly statutory maternity pay, child benefit and the state pension). This means that the poorest decile are actually net tax spenders, not tax payers. It's nonsense to say that their tax rate is higher than the rich, given that so much of their income is due to benefits which are, in the main, paid for by the rich.

In among all this garbage, there is a sole commentator on the left who can hold his head high. Chris Dillow's piece at Stumbling and Mumbling is thoughtful and well-argued (even if he ends up agreeing with Ritchie, which must mean he's got something wrong). 

But I'll accept the implicit challenge in the final paragraph:

Which brings me to my biggest complaint against those economists. To worry so much about the 50p tax rate at a time when real incomes are being squeezed, unemployment is rising and some benefit claimants face real hardship is to display a rather warped set of priorities. 

I disagree. One could use the same argument to criticise any bit of government policy - why waste valuable Parliamentary time on fox hunting bans or smoking restrictions while there are people sleeping on the streets, for example? And there are two serious questions which do rather need to be answered:

  1. Will the 50% rate actually raise revenue?
  2. Is it moral for the government to take 50% of an individual's marginal effort?

This isn't sophistry. If the 50% rate won't raise additional revenue, then as far as I'm concerned it's a left wing conceit that needs to be binned at the earliest opportunity. While we have a significant budget deficit, we must do whatever we can to maximise tax revenues. If that means cutting the top rate of tax, we must do it.

However, we must only do so if we do so morally. For instance, we could cut the welfare bill by killing all the poor. It would be an appalling atrocity that may well trigger invasion by foreign powers and cause riots, but it would work. I don't advocate such a policy as it would be completely immoral. By the same token, we mustn't countenance tax rates that are immoral. My personal view is that it is immoral to take as much as 50% of an individual's marginal effort (I even struggle with 40%).

Instead of feigning outrage, left wing commentators should seek to prove both these points. They must demonstrate that the 50p rate makes an additional contribution to our tax revenues, taking account of actions taken by people to avoid it (e.g. working less hard, never moving to the UK in the first place, leaving the UK for another country, retiring early, etc). And they must argue from first principles why they consider it moral to take half of an individual's marginal effort. Until then, they are merely preachifying to their own flock.

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