I was delighted to hear David Cameron say that he’d look again at the proposed 50% Income Tax band. Indeed this morning I Tweeted “Cameron is right to review the proposed 50% income tax band. It won’t raise revenue. It will simply depress economic activity”. However thinking about it I still have some concerns.
Apparently he said that he will see how much revenue the new tax band collects before deciding whether to scrap it. There are two problems with that: first, how do we assess the net revenue it collects? Second, by the time the tax is in place, and we’ve allowed it to bed in and allowed ourselves time to see how it works, the damage will have been done, and part of it will be irreversible.
You might think that it would be the easiest thing in the world to assess how much revenue the new tax band collects. The Treasury should be able to tell us to the last penny. Fair enough, but that’s only the gross revenue. It takes no account of the downsides, which are much more difficult to measure. Highly-paid, highly-mobile high-flying executives will have moved abroad, to Hong Kong or Zurich or New York. They do have attractive options. Others will spend less time creating wealth, and more time working out complex and sophisticated tax avoidance schemes with their accountants. Still others will have decided that it’s just not worth going the last mile in the face of punitive taxation. They might abandon an investment or expansion scheme, or have an evening at home, or even retire early — and retire abroad. Then again international investors will have realised that the UK has become a less business-friendly environment, a less attractive place to invest, or to locate the head office, and will reallocate resources accordingly. We are already seeing major companies moving abroad to friendlier tax régimes. This can only accelerate the trend.
So in fact it will be very difficult to see how much revenue the new tax band raises. We have to compare what happens with what we think might have happened. But my bet is that the new tax rate will generate no net revenue, but will slow growth and inward investment.
Moreover it will be at least a year or two before we are in a position to form a clear picture even of the gross revenue. By the time we do, those adverse location and investment decisions will have been made, and it will be difficult to reverse them. The reputational damage to Britain’s competitiveness will have been done.
Cameron tells us he’s an instinctive tax cutter. So are most Conservatives. So he should make the decision to scrap the 50% rate now, before the damage is done. We must do everything we can for growth and competitiveness, and we can start with the Hippocratic principle: first do no harm.