Why the 50p tax makes “no economic sense whatsoever”

50p tax is set to lose billions of pounds and push away a generation of wealth creators, according to a new report by the Centre for Economics and Business Research (Cebr).

The report, called “The 50p tax – good intentions, bad outcomes”, was released today and finds that:  

• A new generation of wealth creators have new legal choices because of digital banking and a creative wealth management industry which can mean that while their money is abroad, they can remain working in the UK.
• New financial products now allow individuals to minimise their exposure to the 50 per cent rate of income tax.
• Britain has lost its place as an attractive, low-tax jurisdiction that welcomes wealth-creators and has become one of the most punitive. 
• Since 1997 the UK has already dropped from fourth position to 95th in the World Economic Forum’s tax competitiveness ratings.
• Other European countries are competing in a silent auction for the tax from high earners.
• There is a danger that the 50p tax – combined with higher NICs and VAT, and restrictions on pensions – pushes British taxes over an important psychological threshold that breaks the covenant that wealth-creators feel towards their domestic tax regime. 

Britain’s 270,000 major wealth-creators (the top one per cent of income-tax payers) contribute around £40bn of income tax a year – 25 per cent of the £163bn paid in income tax to the HMRC in total. 

This report suggests that a combination of higher VAT, higher National Insurance contributions, and increased labour and capital mobility will push Britain’s wealth-creators to use new tax-minimising opportunities and move their wealth elsewhere, leaving a vital gap in Britain’s revenue used to fund public services. 

“Our projections show that the 50p tax is set to lose the Treasury more than a billion a year by the middle of the decade,” says Doug McWilliams, the founder and chief executive of Cebr. 

Graeme Leach, chief economist at the Institute of Directors, says the 50per cent tax rate makes “no economic sense whatsoever”. 

“It gives high net worth individuals another reason not to locate in the UK and the end result is less, not more, tax revenue for the Chancellor,” he comments. “The future competitiveness of the UK economy will be greatly improved if we get rid of this tax.”

Mark Littlewood, director general of the Institute of Economic Affairs, agrees that “to have clearly set taxes at such a high rate, such that they punish success but fail to raise revenue, is a ludicrous way to arrange the nation’s finances.”

In March this year Chancellor George Osborne ordered HM Revenue and Customs to carry out a detailed review of the 50p band. But this week Danny Alexander, the Chief Secretary to the Treasury, insisted that the top tax rate should be retained.

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