View from City Road: Taxes still need to be higher

The Liberal Democrats should be congratulated on their courage - if not their political nous - in proposing that the upper earnings limit on National Insurance contributions should be abolished and income tax rates for high earners raised to as much as 60 per cent.

The reaction from their opponents was much as one would expect. The Government protested that high marginal tax rates would damage incentives and stifle enterprise, while Labour argued the Liberals were 'proposing tax increases for no particular reason'.

Both criticisms are off the mark. The evidence that marginal tax rates of 60 per cent or so deter high earners with full-time jobs from working harder or longer is thin on the ground, to say the least. Indeed, a study commissioned by the Treasury in the mid-1980s was hushed up by Nigel Lawson, the then Chancellor, because it failed to find any evidence to back the Government's enthusiasm for low marginal rates.

A more persuasive objection to 'soaking the rich' is the fact that there are not enough of them to provide much revenue. The latest figures show that in 1990/91 there were only 81,000 people who earned pounds 100,000 a year or more - the level the Liberal Democrats say the 60 per cent tax rate could kick in at. These high earners are also likely to have equally well remunerated accountants to massage their tax liability lower.

By the same token, however, Labour is wrong to argue that this is raising taxes for no good reason. The Liberal plans to provide child-care vouchers, more help for carers and to restore benefit entitlements for young people are all worthwhile, on economic as well as social grounds. And, for all the talk of pre-election tax cuts, in truth taxes still need to be higher rather than lower if consumer spending is to be constrained and resources freed for investment and exports.

The uncomfortable truth is that it is not just high earners who should be paying more tax. But even the Liberal Democrats would not admit to that, let alone their invertebrate opponents.