50p tax rate will be bad for business and public finances

50 pence coinThe 50p tax rate for those earning £150,000 or over comes into force today. This new top rate of income tax is the highest of any major economy in the developed world. Over the past year we have argued that the introduction of this tax is bad news for UK businesses. With the new top rate coming in to force today we have produced a report showing the impact that this will have on the business community.

Whilst 80 per cent of IoD members are directors of small and medium-sized businesses and earn significantly less than £150,000 a year, the introduction of this new tax will have a significant indirect impact on their business and the economy as a whole. This tax will impact on entrepreneurial aspiration, business confidence and foreign direct investment, greatly reducing the attractiveness of doing business in the UK. The IoD report shows that, in addition, it is likely to raise little or no tax overall in the short-term, and lead to lower overall tax revenues in the medium to long term.

Why? For the following reasons:

  1. There are obvious tax planning opportunities that are likely reduce the revenue raised;
  2. It is likely that some high income individuals will move to more competitive tax jurisdictions, thus shrinking the income tax base;
  3. The effect of the 50p rate will be to tempt the directors of multinational groups to take their parent companies outside the UK, thus shrinking the corporate tax base.

So as well as further undermining the UK’s troubled public finances, people on lower incomes will get little of the additional help that many politicians are expecting at the expense of high earners. Already the Government is downgrading its expectations of new revenue. Initial Government estimates stated that the rate hike would have a direct annual yield of £2.4bn, but subsequent statements by Lord Myners show that the Government is now anticipating a reduced tax take.

There will also be a knock-on effect on the economy. We believe the UK’s tax system is far less competitive than it was a decade ago. Whether on corporation taxes or other business taxes, the UK is no longer a low tax country. The creation of a 50p rate on income exacerbates the UK’s increasing lack of tax competitiveness and is likely to be a further deterrent to new international capital coming to the UK and to aspiration within.

Political difficulties aside, we think the hike should be reversed as soon as possible. Just when the UK needs strong economic growth, this is one of the worst measures that could be taken. What are your views?

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About Corin Taylor

Senior Policy Advisor Corin was a Senior Advisor in the IoD Policy Unit, covering economic policy, taxation and public service reform issues. He also sat on the Economic Dependency working group at the Centre for Social Justice and has written a number of opinion pieces on tax for the Financial Times.
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