Wednesday, January 12, 2011

Tax tease: Fallacious demand to "Abolish the 50p tax rate"

The FT publishes today a letter containing a passionate demand that the Government 'Abolish the 50p tax rate'.

The writer seems not to understand how most entrepreneurs and growing businesses operate as he concludes his letter:
British job creators must be allowed to keep more of what they earn so they can hire more staff, purchase more equipment and reinvest in their businesses. The chancellor must take heed by removing the 50p income tax rate.
Most 'British job creators' run companies that pay corporation tax on their profits. The main rate of Corporation Tax is not 50%. It's just 28%. Only monies paid out of the companies to the owners and directors are subject to 50% INCOME tax (on amounts above £150k pa).

Together with National Insurance, the 50p tax rate means that the highest earners keep less than half what they earn. This cannot be ideal but there do seem to be political reasons to keep the 50% rate for the moment.

It could be worse of course. When I first qualified as a Chartered Accountant the top rate of income tax on earnings was 83% and there was a 15% investment income surcharge. This meant that the richest taxpayers kept just £2 out of every £100 they received in dividends and interest!

Don't talk to me about 'the good old days'!

1 comment:

  1. Hi Mark,

    You'll remember my angry blogs on Ecademy (9 June 2009) about taxation of small business - which employs 60% of the UK's workforce and produces 50% of its GDP.

    You will also be aware that the IFS has done its research and concluded that taxing income at a rate above the optimal 40% actually reduces the tax take. Conversely, Nigel Lawson saw the tax take leap after reducing the top rate of tax from 60% to 40% in the late 80s.

    I recall George Harrison's song, "Taxman", which contained the line "1 for me, 19 for you"; so as you argue, the good old days were not so great as rose tinted hindsight might suggest.

    Like you, I feel queasy about expensive tax avoidance schemes which are available only to the seriously wealthy. The 50% tax rate is a straight forward attempt to punish the wealth creators for their success, which has the unfortunate outcome that the rich seek to (and can generally afford to) protect their wealth from a rampant HMRC, while the rest of us find our motivation to achieve such wealth somewhat diminished.

    This cannot be good for the recovery of UKplc and when increased taxation leads to a reduced tax take into the bargain I can only gasp at the crass stupidity of such a policy.

    Despairingly yours,

    Charles Cockburn