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Labour’s 50% rate pledge sparks ‘highly emotive’ debate

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The response of the UK’s top income tax payers to the shadow chancellor’s announcement that a Labour government would reintroduce the 50% rate could have ‘big implications’ for tax revenues, the Institute for Fiscal Studies (IFS) has warned. IFS director Paul Johnson and senior research economist David Phillips said the exchequer was ‘reliant on this very small group of individuals for a very large fraction of revenue’. The 1% of income tax payers with incomes in excess of £150,000 paid ‘somewhere between 25% and 30%’ of all income tax.

Ed Balls had contended that Labour’s move ‘would raise a meaningful sum of money to help reduce the budget deficit and make for a fairer tax system’. Opponents, the authors noted, said ‘it could result in an exodus of talent from the UK, a reduction in entrepreneurial drive, and an increase in tax avoidance and evasion, and may actually reduce the amount of tax paid’.

Writing on the IFS website, Johnson and Phillips said Balls had cited recent HMRC statistics. But they pointed out that those figures were ‘estimates and projections of tax liabilities based on the Survey of Personal Income, which is itself based on a sample of tax records’.

The authors concluded that at the moment, the best evidence available suggested that ‘raising the top rate of tax would raise little revenue and make, at best, a marginal contribution to reducing the budget deficit an incoming government would face after the next election’.

David Cameron, asked at a Federation of Small Businesses conference to respond to Boris Johnson’s call to reduce the top rate of income tax to 40%, said cutting the rate to 45% had been the right thing to do, but future rates were ‘a matter for the chancellor’. The mayor of London, writing in the Daily Telegraph, had said the government ‘should open up some more blue water’. He added: ‘Labour is planning to hike tax rates not because it is sensible economics, but because they think it is good politics.’

Kevin Nicholson, head of tax at PwC, said the 50p tax debate was ‘highly emotive’ but was a distraction from a more important issue. ‘Any change to income tax needs to be considered as part of a wider review of the UK tax system. Workers and wealth are becoming more mobile, and income taxes need to be considered in this context. Our economy is also increasingly dependent on international firms, overseas capital and jobs. We need a vision for where taxes will come from for the medium and longer term.’