The FT has published a letter from twenty economists (only 20?) demanding that the 50p upper rate of tax in the UK charged on those earning more than £150,000 a year be abolished.
Sir, We welcome the government putting the promotion of growth at the top of its agenda given the fragile state of the UK economy. Other major economies have got back to pre-recession output levels; the UK has not.
In this context, we are concerned that Britain's 50p income tax is doing lasting damage to the UK economy. It gives the UK one of the highest personal tax regimes in the industrialised world, making it less competitive internationally and making us less attractive as a destination for both foreign investment and talented workers.
Hang on a moment: ten European countries have top tax rates at or near 50% and Switzerland is not far short.
And hang on too: this rate applies to about 1% of UK tax payers (we think: data is not yet ready - but this is the HMRC estimate). To be precise, it's about 328,000 people, HMRC think.
And oh dear, there really is a big error in the claim made: to suggest that talent and remuneration is correlated is, shall we say, just a little bit of an error? There are extraordinarily talented people in this country making a lot less than £150,000 a year. Most of those who are making £150,000 are either in finance (making sure that pensions funds have generated no net return for their members over the last decade or more, for example - one of the weirdest definitions of growth I know and and also one of the strangest definitions of talent) or are in senior management of major multinational corporations where there is no proven link between talent and return, but much more evidence of a cosy club designed to increase the wage gap between senior executives and the rest.
But let's continue:
The UK has already slipped from second to fourth place as a destination for inward investment.
Could that be because of George Osborne's stated intent to do nothing to help growth by cutting government spending so destroying UK markets, by chance?
Or the fact that he's actually encouraging UK companies to set up in tax havens and not the UK by offering a 5.75% tax rate on the profits they make there, by chance? Just a suggestion.
It punishes wealth creation by imposing on entrepreneurs and business people a marginal tax rate in excess of 50 per cent once national insurance contributions are added in.
How does this punish wealth creation? This is a) a marginal tax rate not applied to all income b) not applied to much income derived by 'talented' foreign individuals coming to the UK for less than seven years because of the domicile rule and c) I'm told highly avoidable because the same group say almost no one is actually paying this sum. So where's the 'punishment?' Is it so hard if you're in the top 1% of income earners to make a contribution to the society that gave you that opportunity to profit, enormously?
And where is the squeal of protest from the same group of economists about the poorest 10% in the UK having higher overall tax rates than the group with which they are concerned here?
This is particularly damaging when the UK needs to create new businesses in new industries and promote growth by small companies, which can grow fast. It applies to just 1 per cent of taxpayers, who already pay 24 per cent of all income taxes.
Oh come on: let's stop being ludicrous now. First, by definition most small businesses aren't going to get in the top 1% of income earners - there are about 4 million small businesses in the UK right now, at least (over 1 million companies and 3 million or so self employed). So, let's not make wild claims - not least because all small businesses that will grow fast will be limited companies - enjoying effective tax rates of around 20% or so, utterly undermining this argument.
If a small portion of these highly mobile workers move elsewhere because of the 50p rate then it is clearly a self-defeating way for the Treasury to try to raise money, and a reduction in tax avoidance would be more effective. It is often portrayed as a justified tax on the rich but the economic damage it causes means that it is against the interests even of ordinary workers who don't pay it.
Look, we can stop tax avoidance: that's easy. Just say that those on the 50% tax rate can offset just £5,000 of allowances and reliefs against their income each year in total and that's the job done. Simple, straightforward and saving a fortune in tax planning. Is that what they'd like? I'm all for it in that case.
But to deal with other issues: so, some of these highly mobile workers don't come here (for which there is no evidence, by the way: the claim is they're leaving) - the answer is UK workers take their place. Is there a problem with that?
And what is the damage to other taxpayers? Lower house prices? More equality and a more just society? More opportunity? Better pensions if they weren't being continually fleeced by finance? What is it, I might ask?
But the conclude:
We call on the government to drop the 50p tax at the earliest opportunity as part of a package of measures to stimulate growth. Only by returning to an internationally competitive tax regime will Britain enjoy long-term sustainable economic growth.
Followed by a long list of signatories most of whom are professors of economics. Now I've nothing against professors of economics but they aren't entrepreneurs. They don't earn £150,000. They take no risk: most of them have guaranteed jobs for life, and most of them have never created employment, ever.
I have taken real risk. I have created real employment. I have created and directed a number of companies. I have never made £150,000 a year and never will and do not care in the slightest about doing so. And I do know everything that this letter says is wrong, and wrong because it equates the City activity of arbitraging markets with entrepreneurship and with wealth creation. It is neither. It is a drain on our real economy, on our real wealth creation and claims the income of others to reward those who do it. If the 50p tax rate drives such activity away then it adds to the wealth and health of this country.
NB: I hope I eliminated the typos from this at 18.00 on 7.9.11. The original was written in haste before the school run - I didn't anticipate 10,000+ reads since then.
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Anyone who calls for the 50p rate to be scrapped should declare any interest they might have.
For example, only 1% of the UK population pay the 50p rate but I’d be willing to be that around 90% of newspaper columnists and editors do and they should say so when they write their columns and leaders.
Whilst the headline rate may be 50% for every £1 received by an individual the chancellor receives 57.5p the additional is +2% NI & another 13% NI as a % of £1.13.
Comparison with Swiss or US citizens is weak since they get huge deductions ,mortgare interest, insurance premiums etc. A tax website will show that Swiss pay around 20% tax as we can read in the papers on how many individuals have gone to Switzerland.
I am not a higher rate tax payer but i know that tax at these rates will only mean that more & more middle managers take to tax avoidance and the total tax take will go down. A comparison with the Indian experience in reducing tax rates & the increased growth should be done.
It is no use relying on treasury figures as we know the accuracy of government projections of immigration from the new EU countries was stated at 8-10 thousand people!
A) to include empyer’s NIC is spurious
B) tiny numbers are going to switzerland – a thousand or so a year and that is not up
C) these people are not middle managers – they earn £100k less
D) this country has a problem with people not leaving
E) there is no evidence of laffer effects – it is a spurious idea in range claimed and if it were true people would welcome higher taxes
You do not stack
Again you infer that people in the higher tax bracket do not pay their tax which in my case is a slur that is utterly untrue. It would seem to be a problem many academics have of making the facts fit their scenario. I do not dispute that taxation is needed to help the less fortunate but also providing jobs is a must. All high taxation does is drive investment elsewhere it is quite simple. We live in a global economy and money can be moved anywhere as can be witnessed by the last 3 years. If you think you have a magic formula for creating jobs with no money investment we would all like to see it. Public sector jobs cannot be provided without a healthy private sector and that needs investment. If you wish to take on the world you have to make it worthwhile to invest in Britain that is simple logic. I do not write this with anything other than a simplistic view of how economics works but i am living proof that it does work. Perhaps you and others look to deeply into what is only common sense
As the evidence published this morning on this blog shows – your logic and facts are wrong
And the fact is the wealthy do not pay their taxes – we know that for sure
[…] of where the faults in the arguments are, so rather than reproduce his work, I recommend you go to his blog and read it. It is well worth the extra few minutes of your […]
I thought I must have misheard this today, I was sure I must have got it wrong. The only relief is that I won’t need to have my hearing retested. What planet do these people live on? I thought it was mainstream economics that GDP depends on the amount of money times the rate at which it moves. Money directed towards those who need it most will be spent immediately and grow the economy. Money directed to those who don’t need it is far more likely to stagnate or be misused. For instance, the 70s oil crisis caused a recession because it suddenly pulled a large amount of money effectively out of circulation.
Greed is ever with us
Even amongst the economist class
Having read Richard Murphys comments on the FT letter i find it puzzling that a so called inteligent man cannot understand the basics.We all WORK for money we all invest for profit. If it is more profitable to work or invest in another country most of us will take that option. I am not a clever man but by hard work determination and a lot of luck find myself in the 1% you castigate. I am a sole trader not limited. Most.of my profits are invested back in my business providing work for others less fortunate or less able than me. I have had the same accountant for the 40 years i have been in business who advised me long ago to invest in me not pensions shares or bonds. That advice has worked. If you Richard are saying there is only me in the top 1% who is doing this please send me my medal. If you want people to invest their money you have to recognise they have to be rewarded and by hiking tax rates all you do is alienate them. I have never really looked at turning my back on this country but unfortunately it makes no economic sense to keep my funds in Britain. By moving abroad to a low tax regime i would be a lot better off. I do not live a flash life in fact in many ways i am embarrased to say i am wealthy as it seems to generate hostility as your comments prove.
Overtaxing the rich has been tried many times and never worked lets try slashing taxation to 20% and ge investment money flowing into Britain. Remember 20% of something is better than what you suggest 100% of nothing. And please if you write back do not try to bamboozle me with figures which you and others can make fit any scenarion. I live in the real world and are living proof that the arguement you proffer is a load of bullshit.
So you had a lot of luck. Good.
Now pay your tax to make sure others get the same chance.
It’s a simple deal.
And entirely capable of being understood by anyone.
@tidno
You really can’t understand why a civilised society would need to put constraints on wealth increasingly moving to the top 1%?
What you’re voting for is a tax system closer to Somalia than Sweden. I know where I’d rather live.
> I live in the real world and are living proof that the arguement you proffer is a load of bullshit.
“I live in the real world and are living”? Your grammar needs work too.
Similar point made by Simon Jenkins in today’s Guardian. The crisis is the lack of demand so direct more money to the less affluent who will spend it rather than save.
Just file them away under the heading ‘those who can’t ever believe there can ever be a supply glut’. Brad DeLong has found what he thinks is the first reference to the Confidence Fairy in Alfred Marshall’s writings in 1885 (‘Alfred and Mary Marshall and the Confidence Fairy: Annals of the History of Economic Thought’ on his blog August 18 2011).
Here we go again – right wing economists spreading mis-information. Other economists, from all around the world, are pointing to the lack of economic growth being a result of under-stimulation of the various economies (listen, for example, to Peter Day’s Radio 4 programme ‘In Business’). It has been pointed out that the financial regulation put in place after the 1930s economic crash was lifted by Reagan and Thatcher in the 1980s and that started the de-stabilisation of the world economy. It gave much greater freedom to the financial world and now we are suffering the consequences. Isn’t it funny that Cameron and co. screamed endlessly about how Gordon Brown didn’t regulate the financial sector sufficiently? How much regulation has been put in place by the Coalition? Such hypocrites – but it served their political purpose to criticise Brown.
Serious typo at the end.
“ealth” = “health” or “wealth”?
Wealth I expect
If you saw my schedule this morning typos might be forgiven
Now I’ve nothing against professors of economics but they aren’t entrepreneurs. They don’t earn £150,000. They take no risk: most of them have guaranteed jobs for life, and most of them have never created employment, ever.
Excuse mean Professor of Economics teach students and give them skills, write references so the idea we dont create employment is just loose bunkem !
You create potential employees you don’t create employment. Job opportunities is what he is talking about obviously.
There is little evidence (until the Treasury’s study is completed) to support either argument.
I’ve written this all from the top of my head so please call me out if I have missed any details or misunderstood something.
Hasn’t the actual revenue from the 50p tax rate come in at a third (£2bn instead of £7bn?) of what was expected? The Treasury based its original revenue projections based on income information they have collected and held for years.
This means that a lot of the would-be 50p tax revenue (based on those projections) has already disappeared, been shuffled, restructured or simply left the country. Not the end of the world, though, because we still raised £2bn from it.
However, if people resident and rooted in this country (as rooted as the top 1% of earners can be, which is to say not very) have managed to achieve a shuffling of most of the 50p taxable income, what are we missing out on? Who has decided not to set up a satellite business or hedge fund in the UK? Who has decided not to take early retirement in a plush London pent house and spend all their money in our shops? Who has decided to do it anyway, but chosen to use expensive international advice and facilities to make sure they don’t pay the tax?
This is the part that is hard to quantify and impossible to do so accurately. However, for me, the indicator (£7bn/£2bn discrepancy) is that we’re missing out.
I await the Treasury study in eager anticipation. Unfortunately, it is hard to have a rational debate about this. I get the feeling that most of the 99% who don’t pay the 50p tax would like it in place even if it hurts everyone else in the long-run, because it makes them feel warm and fuzzy.
Jamie,you are right what you say BUT a massive budget deficit leads to disaster.
Sacrifices have to be made by ALL to get the budget back into balance.
There is a clear link between the health of a banking system and budget deficits in it’s operating areas.
The Bush budget deficits (aided by Brown/Blair excessive spending) were the prime cause of our present difficulties in the West.
It is not the commercial banks who create the paper money,it is the sovereign monetary authorities.If money is restricted to the commercial banks,they will lend it to the best risk.
Most financial crises start with budget deficits and when daily needs cannot be financed through borrowing and tax,the printing presses go on overtime.
Zimbabwe is the current classical example of this.
This happened in the Weimar and various South American states recently.
If the likes of Greece had it’s own monetary authority,the would inflate themseves out of one problem and get another-hyperinflation.
I am almost certain that the mighty US will have to debase
Go and read Krugman
And get a grip
When people start talking Zimbabwe you know they have lost it
Almost all your logic is entirely wrong
What’s also left out – or, rather, quietly side-lined – is that the 50% tax is only a 10% increase in tax on earnings over £150k that will otherwise be taxed at 40%. The 50% tax increase is the smallest tax increase (and by far the smallest tax burden on disposable income), yet these economists seem to completely miss that.
Quite
The top tax rate was originally cut to 40% in the 80s due to the influence of Laffer and his infamous curve. Do you see any evidence of the tax take actually having increased as a result? I just see wealthy people taking us all for a ride.
The theory was that better-off people’s increased spending would cause a trickle-down effect. It’s been 30 years, nothing has trickled down, instead it has trickled up.
Should be 90%.
Bravo. Brilliantly said.
I did a bit of back-of-an-envelope maths on this, but it appears more than these 20 economists (sic) have done.
328,000 people.
Assume the AVERAGE amount of income they earn over the £150k threshold is £300k. Most of them will be less than that, but the very few outliers earning millions will push the average up…
328,000 * 300,000 * 10% = just shy of £10 billion.
According to recent articles, a 1% cut in income tax would cost the Exchequer £4.5 billion.
So these economists think that putting £10bn into the hands of 300,000 already-very-wealthy people is a better recipe for the well-being of the country than (say) cutting EVERYONE’s income tax rates by 2p…
How bloody depressing that
(a) they think they’re right,
(b) they’re getting so much earnest news coverage today that isn’t a reporter smacking their hand against their forehead and laughing
(c) noone’s suggesting that they are insane and dismissing their assumptions as utterly false. There are other models for society.
I suspect your numbers are overstated a bit
But your thrusy is exactly right
I do wish you would get tax rates right
The cut was 60pc to 40pc
And the increase in tax was because lots of loopholes were closed – something very different indeed
No one has ever shown a laffer effect
Richard: Sorry, I was expressing the political opinion that the top rate of tax should be set to 90% rather than 50%, and when I said ‘the 80s’ I meant the 1980s! I’m saying that the Laffer curve is a total and utter lie, and that Friedman and his ilk completely ignored. My opinion is opposite to the one you have assumed.
Well I sincerely apologise then!
I’m trying to fit everything into a ridiculouslt busy day made busier by this story and I guess I am proving I am human!
And I agree re laffer
If its alright by Richard, I’s like to ask a tax question. Sone seem to be saying the revenue from those paying the 50% tax rate is £750 million per year.
If it is 1%, or thereabouts, paying 50% income tax, the population is reckoned to around 62 million, therefore 1% of 62 million is 620,000, is it not? I understand those earning ober £100,000 cannot claim tax allowances, so 620,000 paying 10% of £150,000 (£15,000) is £9.3 billion rax revenue per year, is it not?
I’m not that au fait with tax policy and my numbers might be well off, but surely its within £1 – 4 billion per year, surely?
Regarding point B
Look at the way the Guardian have covered the story, particularly the intro paragraph http://www.guardian.co.uk/politics/2011/sep/07/george-osborne-urged-scrap-50p-tax
It’s absolutely appaling.
I should be on comment is free on it now – but even then against a priponent so I tend to agree with you
Those paying 50pc do not pay ,-9 at 12pc
Thereafter your argument falls apart
Ok, well someone earning £160,000 pays an effective 60% of their income in total taxes, and someone earning £200,000 pays 58%.
My assumption was too simplistic (clubbing NI and income tax into a single rate), but I don’t think my argument that you’re misrepresenting the ‘top rate of tax’ of this country ‘falls apart’.
I think you will find your numbers are still wrong
Sorry, yes they are! Pasted in the wrong results. Just transpose the percentages, then they’re right 🙂
No, they don’t. You misunderstand marginal rates of taxation. You pay:
0% tax on income up to your personal allowance
20% tax on the next £37,400 of income
40% tax on the next £112,600 of income
50% tax on any income above that.
The personal allowance is cancelled at over £100k.
National Insurance is calculated per week.
£110 per week (£5,720 pa) is free of contributions
11% is paid on the next £734 (£38,168) of weekly income
1% is paid on any income above that
Taking your example of a £160k salary:
20% of £37,400 is £7,480
40% of £112,600 is £45,040
50% of £10,000 is £5,000
Total due £57,520
NI:
11% of £38,168 is £4,198.48
1% of (160,000 – 43,888) is £1,161.12
Total £5,359.60
Total of income tax and NI is £62,879.60, effective rate 39.3%
For income of £200k we add 51% of £40k = £20,400, total £83,279.60 = 41.6%
No-one pays an effective rate of 51%. It tends towards 51% as N goes to infinity, but never, ever reaches it.
Well said
Great response. Am I the only one who’s amazed that the Guardian have regurgitated this rubbish at the top of their website homepage? Anything to have a go at Osborne.
Richard,
Superb. You’ve nailed the venal bastards.
Fix the typos 😉 and submit this article to all the papers for publication. It deserves a wider audience.
Best,
David.
A version is in the guardian this afternoon
Richard you write ….
“making sure that pensions funds have generated no net return for their members over the last decade or more, for example — one of the weirdest definition of growth I know and also one of the strangest definitions of talent ….”
“….or are in senior management of major multinational corporations where there is no proven link between talent and return, but much more evidence of a cosy club designed to increase the wage gap between senior executives and the rest.”
Two more masterpieces Richard! Little wonder that your website is becoming increasingly popular amongst an intelligentsia who value plain, unadorned truth.
As for pension fund “managers” one could randomly select any bystander over the age of 5 years and rely on them to do a far better job than these clowns.
Doing bnothing would beat most fund managers so you are spot on!
Nothing
Not bnothing!
I bet you many of the Economists who have signed up to the letter didn’t predict the crisis in the first place!
Oh, below the belt
And very good
Did any neoliberal economist predict the crisis actually?
I believe they were too busy wringing their hands over “punitive” taxes on the “wealth creators” and how it was slowing down the free market miracle.
[…] of these mouthpieces of Britain’s economic elite being shredded, I recommend reading the ever-excellent Richard Murphy’s piece. The 50p tax band was one of the most popular policies of the last Labour government. At a […]
Excellent. Thank you for “saying it like it is”. For taking a nonsense letter that most people cannot understand and using real human language to undermine its nonsense claims. We desperately need more of this.
[…] Fisking the demand to cut the 50p tax and showing it for what it is » Tax Research UK. […]
[…] of these mouthpieces of Britain’s economic elite being shredded, I recommend reading the ever-excellent Richard Murphy’s piece. The 50p tax band was one of the most popular policies of the last Labour government. At a […]
Give me a job that pays 150K and I’ll happily pay that level of tax and give to worthy charities.
Correct me if I am wrong, but doesn’t the 50% band only apply to salary ? With dividends I thought the rate was 42.5% ? Correct me if I am wrong.
If that’s the case I would imagine that “entrepreneurs” would mostly take their income as dividends – being the major shareholders in their business. I would imagine that a salary holder is not really an entrepreneur – it suggests that they have no stake in the business but are just doing a job.
Of course that doesn’t include the self employed, though in my experience self employed people with incomes over £50000 will incorporate their business.
Technically tou are right but effectively the tax rate on dividends is 50%. It’s a long explanation though,,,,
[…] of these mouthpieces of Britain’s economic elite being shredded, I recommend reading the ever-excellent Richard Murphy’s piece. The 50p tax band was one of the most popular policies of the last Labour government. At a […]
[…] It’s also fair to say that the flimsy ’economic’ arguments for its abolition can be quite easily dismissed.  Also, it is a band whose collection is somewhat uniquely disadvantaged by the problems of tax […]
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