Let me start with a disclaimer: I knew Nick Clegg reasonably well in my first parliamentary term (1999/2004), when he was the sole elected Lib-Dem MEP for the East Midlands. I debated against him once or twice (with some success). He is a pleasant and likable young man, and so far as I was able to judge, perfectly decent and straightforward, even if hugely deluded on the EU issue. I never for a moment saw him as a future Deputy PM, and he still looks to me like a boy sent to do a man’s job, and finding it tough going.
The Lib-Dems, like Labour, are deeply attached to the top 50% rate of income tax, not for any identifiable economic reason, but because it demonstrates “fairness” in these hard times. It is, however, difficult to see that a tax which deters inward investment, drives high-value executives — and businesses — out of the UK altogether, undermines our competitiveness, stunts growth, increases unemployment and makes us all poorer, can be described as “fair”.
On the Conservative benches, there is strong pressure to drop the 50% rate ASAP. But Danny Alexander, Lib-Dem Chief Secretary of the Treasury, has described this idea as “Cloud Cuckoo Land”.
Nevertheless, the signs are that George Osborne (God bless him) is determined to do just that, at the earliest opportunity. The Lib-Dems have not publicly accepted that, but they are preparing the ground to do so, suggesting that if the 50% rate goes, we need to find some new way of punishing success, and they are resurrecting their old idea, beloved of Vince Cable, of a “mansion tax”.
Nick Clegg is reported as saying that revenue from the Mansion Tax would be needed “to replace the revenue from the 50% rate”. And this brings me to my question: fool or charlatan? Clegg knows (or ought to know) that a tax rate this high collects no additional net revenue at all, and indeed probably reduces revenues, for all the reasons with which we are familiar, and which I outlined above. It raises no extra revenue in the short term, and by depressing growth and investment ensures lower revenues in the longer term. If he doesn’t know this, he is a fool. If he does know this, but refuses to admit it, he is a charlatan. But because I like the guy and I don’t want to be unkind, I’ll offer him a let-out. Perhaps, just perhaps, he’s merely a prisoner of years of woolly knee-jerk Lib-Dem left-wingery, and can’t quite find his way out.
Warren Buffet has muddied the water by urging that in America the rich should pay more tax. But he argues that on the grounds of personal morality, not economic policy, and he has in effect answered his own question by becoming one of the world’s largest charitable donors. The great thing about wealth creation linked to fair and moderate tax rates is that, as we see in America, it promotes philanthropy on a vast scale.
There is overwhelming evidence that progressive taxes depress growth, while flat taxes promote growth. The Laffer Curve shows that there is an optimal level for tax rates to maximise revenues. Set rates higher, and you depress revenues and growth.
I heard a commentator on the BBC arguing for higher taxes on the rich. “I earn more, so it’s fair that I should pay more”. Of course. If you earn twice as much, it’s fair you should pay twice as much (which is what happens under a flat tax). It’s not fair you should pay four times as much, as we do today, or many more times as much, as some are calling for.
Fortunately Osborne understands all of this. He is determined, rightly, to make the UK a more attractive place to do business and to invest. So we need radical action on tax. A report in today’s Telegraph covers a Centre for Policy Studies paper pointing out that while we cheerfully talk about a top rate of 50%, the real top rate for some higher earners, taking account of National Insurance and the clumsy claw-back of allowances, is as high as 66%. This is like the bad old days before the Thatcher revolution. We have to learn those lessons all over again.
So Osborne must move fast to scrap the 50% rate. He must rule out any talk of a Mansion Tax. He must set out a road-map to make the UK a business-friendly, low-tax environment. And one more thing. He and the government must have a change of heart on green policies and renewable energy. If he doesn’t, energy costs alone will be enough to scupper the British economy.