Taxing times: The politics of Ed Balls’s pledge to reintroduce the 50p rate may be sound. But the economics are not

The 50p rate simply does not bring in enough money to justify its own existence

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The Independent Online

Ever since the Coalition lowered the top rate of tax from 50 to 45 per cent in 2012, the shadow Chancellor, Ed Balls, has lost no opportunity to damn the “tax cut for millionaires”. Small wonder, then, that he has now said that if Labour wins the next election, in 2015, it will restore the 50p rate to those earning more than £150,000 a year, and so reverse an “unfair tax cut for the richest 1 per cent”.

In one sense, the release of this not unforeseen thunderbolt is a politically savvy manoeuvre that kills two birds with one neat stone. Most opinion polls show that Labour’s electoral weak point remains the economy and, in particular, the perceived absence of a convincing strategy to bring down the deficit. Mr Balls maintains that raising taxes on the rich part-answers that charge, because the extra money would help finish the job of generating a surplus by a target date of 2020.

At the same time, of course, taxing the rich would go down well with Labour’s core vote. And at a time when the Opposition claim that ordinary people are not benefiting from the recovery is losing credibility – as data suggests that wage rises are finally starting to outpace inflation – Labour needs a new idea.

The hope for Ed Miliband is that the 50p tax pledge may counteract a perception that his party is policy-lite and help widen a poll lead against the Tories that has narrowed to just a few percentage points of late. For all that, a whiff of desperation surrounds Mr Balls’s announcement. The risk for Labour is that voters may warm to the plan initially, only to decide on polling day that they can do without such gimmicky gestures when significant economic challenges remain. Ominously for Mr Balls, Lord Myners, a former Labour minister under Gordon Brown, has already condemned a return to the “politics of envy” – and he may not be the only insider to complain about the direction in which the party is heading.

But the real problem about restoring the 50 per cent top rate is not so much that it is a sop to the envious; it is that it would not do as Mr Balls claims. Politics aside, the Government’s reasons for axing the top band were economically sound. After two years in operation, the 50p rate had not brought in enough money to justify its existence, and a basic rule of a sound economy is that the justification for taxes is that they fulfil a visible function.

Judging by figures supplied by HM Revenue and Customs in 2012, the 50 per cent band failed to meet that criterion. The yield was almost statistically insignificant when compared with Britain’s total average tax revenue of more than £150bn annually.

For the Labour Party, the central risk is to enter the next election as the party of tax and spend. The danger for the Conservatives and Liberal Democrats, meanwhile, is that they find themselves typecast as the fat cats’ friends. However, the inescapable reality behind the political tug-of-war over the top tax band is that the rates for everyone – not merely the wealthiest few – are going to have to rise after 2015 if Britain is to maintain its public services at their present level. Regrettably, neither side is yet willing to admit this electorally unpalatable reality.

Watch Ed Miliband defending Labour's tax plans