On Monday the Institute of Directors (IoD) put forward 15 key recommendations which it said would help the British economy to recover. As well as calling on the government to scrap the 50% rate for the highest earners, the IoD also wants the coalition to commit to cutting corporation tax to 15% by 2020.
The IoD argue that the 50p tax rate makes Britain an unattractive destination for talented entrepreneurs, and highly skilled workers.
"The 50p tax rate sends out the message that we're a high tax country”, Richard Baron, the IoD's head of taxation told International Tax Review. “It’s like going round the world with a 50p label stuck to your back. It sends out the message that we don’t value your ambition”.
Kevin Hindley, a managing director of Alvarez & Marsal Taxand UK, agrees that the so-called “additional rate” is damaging Britain’s economic prospects. “If you tax the rich until they scream, they will begin to leave” he said.
Hindley also believes that the 50p rate is stifling inward foreign investment. Companies that move staff to the UK are having to pay them more to make up for the higher tax rate, he said. Meanwhile the people making investment decisions may be put off by the prospect of lower take-home pay.
“When you are deciding which country to invest in, you shouldn’t be thinking about how it will affect your personal position, but a 50p tax rate does have an effect”, Hindley added.
The chancellor of the exchequer, George Osborne, yesterday appeared to rule out any tax cuts in the immediate future. Speaking at the Conservative Party's annual conference he said: "I'm a believer in tax cuts - permanent tax cuts paid for by sound public finances. Right now, temporary tax cuts or more spending are two sides of exactly the same coin, a coin that has to be borrowed - more debt that has to be paid off". Before his speech he told the BBC: “I am not a believer in deficit-funded tax cuts.”
Opponents of the 50p rate argue that getting rid of it is unlikely to substantially damage public finances. “It’s not simply the case that lower tax rates lead to lower tax revenues” Hindley said. “As rates of income tax decrease there is less of an incentive for individuals to engage in aggressive tax planning or leave the country for more benevolent fiscal regimes.“
Baron says that while the government's programme to cut the deficit must stay on course, it would not be harmed by an end to the 50p rate. “The 50p tax rate rate actually raises very little, and its effect on public finances may even be negative,” he said.
However, Richard Murphy, the director of Tax Research, argues that the top rate of income tax is neither ineffective at raising revenue, nor damaging to the wider economy. “The claim that the 50p tax rate doesn't raise money is an utter lie”, he said. “If it didn’t, the IoD wouldn’t be making a fuss about it.” The call for an end to the 50p rate was, he said, based on "complete and utter self interest".
Baron believes the 50p rate is unlikely to be scrapped during this parliament, especially because of the coalition agreement. However, he believes that such a change is likely to feature in manifestoes at the next election.
