Duncan’s Economic Blog

The 50p rate & the pressing concerns of economists

Posted in Uncategorized by duncanseconomicblog on September 7, 2011

The UK economy is beset by a multitude of problems – falling real wages, a consumer recession on the high street, contracting manufacturing, weak business investment, high inflation and worrying signs of trouble in the labour market. In internationally the Eurozone is in crisis, the US economy is slowing and unable to generate jobs and the ‘currency wars’ look to be flaring up once again.

So it is somewhat disappointing that 20 eminent economists have decided that now is the time to revisit the 50p tax rate – clearly for some the real pressing issue of the day.

The fact that I greatly respect many of the signatories makes this even more depressing.

We don’t yet know if the 50p rate is raising revenues – although I suspect it is. Even the government now seems to admit that, recently briefing that:

Treasury analysis shows that Labour’s decision to raise the rate to 50p for those earning £150,000 a year or more has generated up to £2.4 billion a year.

The central argument of the 20 objectors is that Britain is now: 

one of the highest personal tax regimes in the industrialised world, making it less competitive internationally, and making us less attractive as a destination for both foreign investment and talented workers

An argument not backed up by either immigration figures (where the attempt to cap numbers is struggling) or foreign direct investment analysis (where the UK is ranked highest in Europe).

I also notice that the economists make no effort to put a figure on what the contribution to growth of cutting the 50p rate would be.

We’ll get a Treasury analysis of the effects of the 50p rate in the next few months – not that this will settle the argument, the crucial assumptions on how the rate has affected behavior will no doubt be subject to argument, one year after the bankers’ bonus pay roll levy there is still a fight about how much it raised. This letter seems an attempt to soften the ground for cutting the rate.

I’m reminded of one of favorite Kalecki quotes (actually on using fiscal policy to achieve full employment rather than on tax per se, but the point stands):

In this situation a powerful alliance is likely to be formed between big business and rentier interests, and they would probably find more than one economist to declare that the situation was manifestly unsound.