Sean O'Grady: Changes to top-rate tax are symbolic, not seismic

 

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Purely in terms of the effects on government revenues and borrowings, moving the 50p rate to 45p in the pound will make little difference in the great scheme of things – maybe a billion or two either way in a tax-take hundreds of times that number. Useful as such sums may be to the Exchequer, they are largely totemic.

The "boost" to the economy as a whole would be rather greater, as that money gets into the shops and starts to circulate. Even then, and assuming it was all spent rather than saved, the effect is relatively modest; probably less than £5bn in an economy of £1.4 trillion. What's more, top-rate taxpayers comprise the wealthiest few per cent of the population, and are likely to save the extra money, if they notice it at all. It would, thus, do little to create jobs and bolster spending.

A much more efficient measure would be to raise social security or pensions, where the vast majority of the funds would burn a hole in the recipients' pockets because the poorest can easily find a use for it. Taking more of those people earning less than £10,000 a year out of taxation, an avowed Coalition goal, would also be more effective.

Cutting the top 50p tax rate ought not to be dismissed however. No one is going to alter their entire life just because of some small adjustment in income-tax rates. But economics works "at the margins", and a relatively small incentive could dissuade some on the cusp of a making a personal decision to, say, move their banking work to Switzerland. In that way it may do good.

Longer term, the Government ought to encourage entrepreneurs – and reducing the rate to 45p and would be a step towards George Osborne's ambition to have the lowest tax regime in the advanced world. Then again, it is embarrassing for a government where deficit reduction is supposed to be the overriding priority.

Besides, the public finances are so dire there must be doubt as to whether the new 45p rate really signals a rapid movement towards the ultra-low tax economy Thatcherites dream of, or whether it looks more like a gimmick. It seems a high price to appease a few Tory backbenchers. I doubt it would impress the IMF.

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