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UK Politics

Lib Dems rebuff grassroots’ calls to restore 50p tax rate

Treasury claims high earners would find ways to avoid top rate

Liberal Democrat leaders have rebuffed demands from grassroots members for the party to fight the next general election on a pledge to bring back a 50p top rate of income tax.

David Laws, who heads the group drawing up the party’s manifesto, told The Independent it would include measures to ensure the very rich made a greater contribution. But he expressed doubts that raising the top rate from 45p to 50p would generate more revenue because high earners would find ways to avoid paying it.

A 45p rate on earnings over £150,000 a year took effect this month, provoking Labour claims that the Coalition had introduced “a tax cut for millionaires”. Labour is likely to promise to restore a 50p rate in its manifesto and some Liberal Democrats, including the party president, Tim Farron, want Nick Clegg to make the same pledge to distance the party from the Tories.

Mr Laws, the Schools Minister, said: “There is agreement in the party that we have got to make sure people on very high incomes are making a useful contribution. However, we need to make sure that the tax policies do it in a way that delivers the revenue and are not just symbols. We know that lots of people who have very expensively provided advisers on tax can sometimes run rings round the Government.”

He said a final decision would be made at the Liberal Democrat conference in September, which would consider recommendations from a tax working group. He added: “The group is more concerned about being effective in getting the revenue.”

Mr Laws’s statement, which is believed to reflect Mr Clegg’s thinking, will disappoint party activists. Naomi Smith, co-chair of the Social Liberal Forum, said: “A focus on wealth taxes should be the key for the next Lib Dem manifesto but the 50p shouldn’t be ruled out: post-2015 the party is not bound by the current presumption about the proportion of tax to spending cuts.”

The party leadership appears to have been convinced by Treasury estimates that the 50p rate backfired because high earners worked round it. Labour introduced the 50p band in April 2010, on the eve of the general election. For nearly all its 13 years in power, the top rate had stood at 40p.

Treasury figures suggest Labour’s move raised about £1bn, only a third of the amount expected, and that rich people shifted more than £16bn of income into another tax year to avoid it. Tory sources claim that the number of people declaring earnings of more than £1m a year dropped from 16,000 to 6,000, costing the Treasury £7bn in revenue. But Labour and some Liberal Democrats say there was not time to judge the impact of the 50p rate before George Osborne announced its abolition in his 2012 Budget.

The Liberal Democrats’ tax pledges are expected to include their long-standing goal of a mansion tax on homes worth more than £2m, which Mr Clegg has proposed inside the Coalition but which has been blocked by David Cameron.