Felix Bungay: Abolishing the 50p tax rate doesn’t have to be politically toxic

Felix Bungay is Head of Research at the Trade Policy Research Centre. Until recently, Felix was chairman of the Conservative Association at the University of York.

Various Conservative and Lib Dem MP’s have rowed into the debate, either claiming the tax should be scrapped (Eric Pickles) or that getting rid of it would put us in ‘cloud cuckoo-land’ (Danny Alexander). Most recently, Nick Clegg has said he won’t let Osborne remove the 50p tax rate, at least until it is replaced with another ‘rich bashing’ tax and the tax free threshold has been increased significantly.

The second half of his proposal shouldn’t prove hard to reconcile with Conservative views; the idea of increasing the tax free threshold was considered by Michael Howard, and Lord Saatchi had spoken in favour of it long before it made it into the Lib Dem manifesto. However, a ‘mansion tax’ or another policy dreamt up to sow division and attack the wealthy should be decidedly rejected. The tax system is there to raise money, not to engage in posturing to enable the Lib Dems to salvage a few points in the opinion polls.

But whilst there has been disagreement over whether the tax should stay or go,everyone, including those who argue for the abolition of the 50p rate, points to the implicit political toxicity of doing so.

The economic rationale for scrapping the tax has always been sound and the evidence speaks for itself. When, under Lady Thatcher, tax rates for the wealthy were cut to 60% and then to 40%, not only did the total tax take continue to increase, but the actual proportion of income tax paid by the rich shot up as well. Cutting tax rates onthe rich proved to be progressive. This message must be shouted from the roof tops: higher rates of income tax mean the poor suffer, and the rich pay less. In addition to this historical evidence, the Institute for Fiscal Studies predicted that the 50p rate would fail to raise money, the OECD said it would damage investment in Britain,and the Treasury is currently undertaking a study into how much money it actually is raising. It has always been the political implications of the tax which have proved to be more complex than the economic.

When the tax rate was first announced back in 2009 it was a political trap for the Conservatives, a classic Brown dividing line. Cameron estimated that opposing this tax risked the party being painted as the friends of the bankers and out of touch with ordinary people. However, in doing so he missed an opportunity to put Brown on the wrong side of his own dividing line.

Tony Blair remarked in his biography that the moment New Labour died was when Alistair Darling (or more accurately Gordon Brown) introduced the 50p tax rate. Blair had gone to huge pains to change people’s perceptions about the Labour party, anda key part of this had been to pledge not to raise income tax on anyone. New Labour was, in Peter Mandleson’s words, “intensely relaxed” about people becoming rich. Before the 2005 election, in an interview with Jeremy Paxman, Tony Blair gently remarked that he had no burning passion to see David Beckham earn less money. New Labour was the party of aspiration, not class war.

This all changed under Gordon Brown, and a chance for a cheap shot at the Conservatives proved all too tempting, but at what cost to the Labour brand? Labour’s economic credibility is constantly questioned, and the Conservatives continue to out-poll Labour when asked who is more trusted with the economy. Alistair Darling’s memoirs reveal that even members of their own party doubt that Labour is taken seriously on the economy. Of course, there is more to this than the 50p rate of tax, but I think Tony Blair, the man who led Labour to three historic victories, knows better than most that the 50p rate is ultimately damaging to the Labour brand.

All in all, this represents a significant opportunity for the Conservative party. If we can show people that the tax rate ultimately means they end up paying more, we can put Labour on the wrong side of the debate; ideologically pursuing class warfare despite the damage it does to the economy. Nick Clegg said that, “It would be utterly incomprehensible for millions of people, if suddenly the priority is to give 300,000 people at the very, very top a tax break.”. He is right - it wouldn’t be fair just to cut taxes for the richest. The timing of the 50p rates removal must be coupled with a sizeable tax cut for everyone else, so the whole thing can be sold as a package to help bolster economic growth and to give everyone (not just the rich) some extra money intheir pocket.

Either way, it is time we stopped letting the debate on taxation be continually haunted by the political ghost of Gordon Brown and the lame politicking of Nick Clegg. It is time we recast the debate so that the Conservative party is on the side of aspiration and tax cuts, not class war and reaching into people’s pockets. With a little courage we can put Labour on the wrong side of this political divide and step into the space left by the death of New Labour. If Cameron really wants to be the heir to Blair, then the 50p tax rate must go.