Leading article: A lever that the Chancellor would be unwise to pull

However it is dressed up, a tax cut for the wealthy is still a tax cut for the wealthy
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The Independent Online

The Conservatives are preparing a move on tax cuts. As we report today, George Osborne is examining the case for lowering the top income tax rate from 50p to 45p, which would partially reverse the rise enacted by Alistair Darling in 2009.

The macroeconomic justification for reducing marginal tax rates on high incomes is a familiar one. It is argued that such tax cuts pay for themselves because they end up bringing in more revenue than higher rates. But the evidence base supporting the so-called "Laffer curve" is rather meagre.

It is notable, too, that adherents of this economic creed confidently predicted that Labour's 50p tax rate would not bring in any new revenues because the rich would find ways to avoid paying the levy. But, in fact, Labour's tax rise does seem to have successfully boosted tax revenues over the past two years. If there is a marginal rate at which taxation becomes self-defeating, we do not appear to have reached it yet.

And if the Coalition wishes to give the economy a boost through a tax cut, a reversal of its own rise in the VAT rate would be more effective. Reducing the top rate of income tax would benefit some 300,000 people. A cut in VAT would put money in the pocket of almost every adult in the country through cheaper fuel and energy bills.

The political logic of the move is just as dubious. Within the Conservatives, of course, this tax cut would be wildly popular. The Tories have always detested the 50p rate. The London Mayor, Boris Johnson, called for its abolition after disappointing growth figures last week. Mr Osborne does not want his expected future leadership rival to be able to present himself as the champion of lower taxes.

Yet Mr Osborne has more to worry about than the ambitions of his Tory colleagues. The Chancellor's Liberal Democrat coalition partners are trenchantly opposed to any reduction in the 50p tax rate at the moment. At the weekend, the Chief Secretary to the Treasury, Danny Alexander, argued that those calling for such a move are living in "cloud cuckoo land". The Business Secretary, Vince Cable, called any reduction "politically inconceivable".

The signs are that Mr Osborne would attempt to dress up any reduction in the top rate as "tax simplification" and to point out that the top marginal rate of tax will still be 58p in the pound when national insurance is included. Yet a tax cut for the wealthy is still a tax cut for the wealthy.

There is nothing inherently virtuous about high marginal income tax rates. And if the public finances were in robust health there might be a case for bringing them down. Yet that is not where we are. Mr Osborne has embarked on a programme of deep spending cuts. The vast majority of people are experiencing the most severe squeeze on their standards of living since the 1920s. There are close to one million young people out of work.

And in this context of widespread pain, Mr Osborne is apparently considering cutting the tax bill of some of the wealthiest people in Britain for a questionable wider economic benefit. The Chancellor should think very hard before reaching for this lever. Reducing the 50p tax rate would be bad politics and bad economics.