At the TPA, we've just released a new report that I've co-authored with Jonathan M. Scott, a Teaching Fellow at Queen's University Belfast and blogger. Tax and Entrepreneurship looks at the relationship between the tax system and people's decision to start a new firm. It points out that in order for the risks association with starting a new firm to be financially worthwhile, there need to be rich rewards if things go well. Often, those rewards will go beyond someone's immediate needs and be saved and then passed on to children, it's no accident that Theo Paphitis on Dragon's Den refers to the money he invests as "my children's inheritance."
Unfortunately, that gets taxed heavily and repeatedly. The money is taxed when it is earned, when it is saved and invested in a company and then again when it is passed on to children - even before it is spent. That adds up to a total top marginal tax rate of 90% even with the current income tax regime and a top rate of 40p. Throw the new 50p top rate into the mix and you're talking about a top marginal tax rate of a massive 92%. 20% of the amount people are left with right now will be taken away with the introduction of the new top rate. That is a massive burden and will reduce the incentives to start a new firm.
That means that the 50p rate shouldn't just concern the rich. The vast majority of new jobs are created by new firms, particularly the high growth "gazelles". If we see fewer of those firms thanks to the new 50p rate then more people losing their jobs now thanks to the recession will have to wait longer to find work again.
The Institute for Fiscal Studies and other independent forecasters have said the 50p rate could lose money, as we've shown it could impose a serious cost on society in terms of lower employment and there is a serious threat of a drain of talent from our shores. Gordon Brown's political stunt can't be allowed to impose that kind of burden on the British economy.
None of this means that we shouldn't see easing the tax burden on the poor and confronting the crisis in the public finances as absolutely the priority. Too many are suffering under an excessive tax burden, particularly thanks to the doubling of council tax over the last decade. If the 50p tax rate isn't going to raise any money though, then it isn't a matter of setting priorities. Scrapping it wouldn't make any practical difference to a new government's ability to restore the finances to health and then get to work bringing the tax burden on ordinary people down.
Restoring the public finances to health will mean cutting spending, which has been rising by tens of billions a year for far too long. In order to get a mandate to do that, politicians have to make the need for cuts clear and start setting out the kind of measures they will be taking, not pretend that increasing taxes on a small number of highly mobile and economically vital people will help anyone but our economic competitors.
