Axing the 50p tax
by Peter Kellner in Commentary
Mon September 12, 6:32 p.m. BST
Should the 50p tax rate be scrapped? Peter Kellner considers our recent polling for the Sunday Times to explore public attitudes surrounding this divisive issue
For connoisseurs of political rows, the spat over the 50p tax rate is maturing nicely. One side insists that it is a matter of fairness, that we 'are all in this together' and that it would insult the vast majority of people whose incomes are being squeezed if the richest among us receive a tax cut. The other side says that the 50p rate is bad for enterprise, threatens to drive wealth-creators abroad and will raise little if any extra revenue anyway.
YouGov has tested public attitudes in our latest poll for the Sunday Times. It adds to the dilemma that politicians face – and helps to explain why the issue is provoking a dispute between many Conservatives and their Liberal Democrat Coalition partners.
First we reminded people of what has happened and asked them a straightforward question:
In 2009 a new top rate of income tax of 50p in the pound was introduced for earnings over £150,000. Previously the top rate of income tax had been 40p in the pound.
Do you think George Osborne should or should not abolish the current 50p top rate of income tax on those earning over £150,000, meaning the top rate would be 40p?
By a margin of more than two-to-one – 60% to 27% - the public thinks the 50p tax rate should stay. However, that apparently clear verdict needs qualifying in two ways. The first is that only 3% of taxpayers – or around 2% of the electorate as a whole – pay the 50p tax rate. This means that a quarter of the public are people who DON’T pay the 50p rate who nevertheless want it scrapped. Some of them may well hope to earn £150,000 soon; but most of the scrap-the-rate contingent do not plausibly fall into this category. So there is a significant minority of the public who want the rate to go even though they won’t benefit directly from it.
Second, responses by party loyalty are telling. Tories are evenly divided – 46% want the 50p rate to stay, while 43% want it scrapped. Labour voters split overwhelmingly, 75-18%, for keeping the rate. What about Lib Dem supporters? On most issues they tend to sit somewhere between Tory and Labour voters. This time their views are statistically identical to those of Labour voters: 74% want to keep the 50p rate while just 17% want to scrap it. No wonder Nick Clegg, preparing for next week’s Lib Dem party conference, is taking such a tough line against abolishing the 50p rate.
In order to dig down further, we asked respondents whether they thought the 50p rate was helping or harming Britain’s economy. Most voters decline to take sides, with 25% saying it helps the economy, while 18% say it does harm; but the largest group, 39%, say it makes no difference while 18% aren’t sure.
Again, Lib Dem voters line up with Labour supporters; those who take sides divide two-to-one in saying the rate helps the economy, while Tories divided two-to-one in saying it does harm.
It’s a similar story when people are asked whether they think the 50p rate actually brings in more money. The public as a whole divides evenly, with 38% saying it does, while 35% say it doesn’t. Yet again, Tories line up on one side, with two-to-one saying it does NOT yield extra revenue, and Labour and Lib Dem supporters, again by two-to-one, say it DOES generate extra money.
Finally, the crunch question:
|Imagine it was the case that a top tax rate of 50p did not bring in any extra money. Which of the following would best reflect your view?||%||Con %||Lab %||Lib Dem %|
|If a 50p top tax rate does not bring in any extra money then it should be abolished||45||66||31||40|
|A 50p top tax rate should be kept regardless of what it brings in - it is morally right that the rich should pay higher taxes||42||25||58||51|
Again, the public is divided; again Lib Dem voters sit nearer Labour than Tory voters (though this time there is some difference between the two parties).
In the short-run, then, the politics of the 50p rate look treacherous. Any early move to abolish it would risk the Tories being branded as a party of the rich and would certainly provoke a hostile reaction from the Liberal Democrats.
However, I am less sure about the long-run effect. In 1988 the Tories were roundly condemned for favouring the rich when they reduced the top rate of tax from 60% to 40%. Four years later they were re-elected with more than 14 million votes, the largest ever secured by any political party. The top-rate controversy had largely died down, Labour actually lost support by proposing higher National Insurance rates for the better off, and the perception that the Tories were the competent party trumped criticisms that they were the heartless party.
Something similar could happen this time. Assuming that the Lib Dems, however angry they feel, don’t pull the plug on the coalition and force an early dissolution, then the next general election won’t be held until 2015. Suppose the inquiry that the Chancellor has commissioned finds that the 50p rate is bad for the economy and raises little if any extra revenue; and suppose George Osborne scraps the rate in next year’s Budget. He will then have three years to prove that his judgement is right. If the economy does start prospering, he will at least have a case he can make.
What he should NOT do is wait until, say, 2014 to scrap the rate. He will then have too little time to show that a lower top rate helps the economy. His real choice is to cut the top rate next year – or wait until after the next election. Neither option is guaranteed to work, politically or economically, but either has a better chance of succeeding than cutting the rate close to the next election.