Britain would be more competitive with a 40p top rate

 

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Much has been made of the coalition decision to drop the 50p tax rate. No discussion of economic policy passes without Labour references to the “millionaires’ tax cut”. In response, Conservatives and Liberal Democrats alike talk sagely of the “Laffer curve”, the theory describing the link between tax rates and tax revenues that posits a point at which higher levies actually reduce the Exchequer’s income (because, for example, people are discouraged from working).

There is no more agreement over the effect of the reduced rate on the Treasury. Only last week, the former Tory cabinet minister John Redwood produced an analysis of official data showing that the amount of tax collected on earnings above £150,000 has gone up from £40bn to £49bn, purportedly proving its worth even in times of austerity. Labour immediately countered with claims that high earners had deferred income and bonuses until after the lower rate came into effect, skewing the figures.

But the debate is not a purely retrospective one. A Liberal Democrat former minister reshuffled out of the Government last October is keen to reopen it. Indeed, according to Jeremy Browne – writing in The Independent today – it is time to go farther. With Britain facing sharp competitive pressure from an increasingly globalised world, an “authentic liberalism” is the only answer, he says. That means liberalising markets, fostering innovation and doing more to boost economic productivity – including taking the top rate of tax back down to 40p.

It may be difficult to be certain of the effect of tweaks of a few percentage points in either direction; but where Mr Browne is right is in his central point, that Britain’s primary economic challenge is one of competitiveness. And even if a lower top tax-rate is not a certain route to fuller public coffers, it is certainly an element of the country’s business environment.

One of the most significant achievements of the Coalition has been to raise the income-tax threshold at the bottom of the scale; there is now a case for looking at doing more at the other end. It is as well to remember, however, that although the top tax rate is of huge political significance, economically it is only one factor out of many.

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