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Four paths to the abolition of the 50p tax rate

By Tim Montgomerie
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On BBC1 earlier Danny Alexander said it was "cloud cuckoo land" to believe that the Coalition would abandon its focus on cutting tax for the low-paid and abolish the 50p rate. "Anyone who thinks we're going to shift our priority to reducing the tax burden for the wealthiest has," he continued, "got another thing coming."

He was reacting to calls from, first, Boris Johnson and, today, Norman Lamont, for the 50p rate to go. Lord Lamont, writing in The Sunday Telegraph, argued that "the fifty per cent higher rate of income tax is probably one tax which could be abolished without any effect on revenue."

So, has the Chief Secretary shut and bolted the door to abolishing 50p? I think there are still four ways of getting rid of it...
  • First is to wait for the HMRC's report into the 50p rate's impact - as commissioned by George Osborne. If Labour's supertax is shown to be producing no new revenue then resistance to its abolition might melt away.
  • Second, if the HMRC report is ambiguous but 50p is still judged to be harmful the rate could be kept but the threshold at which it starts being paid could be raised substantially. It's currently £150,000 but if it was raised to, say, £500,000 it would bother far fewer people.
  • Third, and I know ConHome members don't like this, the 50p rate could be abolished by replacing it with a tax that still impacts the rich but is less economically harmful. In Coalition politics the Tories get the 50p rate abolished (and I would say should also seek a higher threshold for the increasingly troublesome 40p rate) but the Lib Dems get some sort of mansion tax. I strongly support an overall rebalancing of the tax system where we tax income, investment and family formation less and impose more tax on high value property and 'sins' such as pollution. This rebalancing wouldn't only help the wealth creating part of the economy it would also help the young and therefore stem a brain drain.
  • Fourth, we could go for what I shall call the Daley/Lamont option. Lamont in his piece and Janet Daley in hers say you abolish 50p but only as part of a wider tax cutting package that also benefits lower income families. There's no way Osborne would agree to such cuts unless spending was cut faster or he used the year of headroom he has in his reduction plans (currently he's on course to eradicate the deficit 12 months before he needs to).

I think the first option is the most desirable. Option two is the most likely. Option three should be the long-term direction for the UK tax system. If Osborne goes for option four - perhaps in his Autumn Statement - it would be a sign he was genuinely worried about UK growth.


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