Ministers reject tax cut for wealthiest earners
A bitter political fight has broken out in the UK over how much tax the country should take from the piggy banks of its top earners. Public opinion says 'tax the rich' – but might this damage the economy?
How much tax should the richest people pay? It's a hotly contested question, which is causing renewed controversy in the UK after a group of top economists called for a cut in the top marginal rate of income tax.
At the moment, anyone who earns more than £150,000 per year pays 50p in tax for each pound they receive above that threshold. This '50p rate' was introduced after the financial crisis of 2007 as a temporary measure – under the old system, no one paid more than 40p for each pound. This week, however, a group of 20 top economists wrote a letter to the Financial Times to call for the 50p rate to be abandoned.
The 50p rate, they argued, makes the UK 'less attractive' for companies, investors and executives and discourages hard work. In fact, they claimed, the high tax rate probably doesn't even make the government any money. By driving high earners away from the UK, and by encouraging tax avoidance, the 50p rate is reducing total revenue. 50% is a bigger slice than the old rate of 40%, but it's being taken from a smaller pie.
But, within hours of the letter's publication, politicians of all parties were lining up to disagree with the economists' argument. A Liberal Democrat MP said cutting the tax would be 'phenomenally immoral'. Shadow Chancellor Ed Balls said opponents of the 50p rate were 'not living in the real world'. He told the BBC that the top tax rate does raise money – over £1 billion per year according to official predictions.
Conservative ministers agreed that the 50p rate should stay for now. But Chancellor George Osborne has said that the tax is 'very uncompetitive internationally' and promised it will not be maintained for too long.
For governments struggling to pay their bills, this question of tax is an old problem. Put rates too low and you fail to collect enough income from your economy. But if rates are too high, the economy itself shrinks, causing poverty all round. The trick is to find the sweet spot between the two extremes.
Politicians and economists disagree about where this spot might be. Fundamentally though, opinions on tax are as much about principles as practicalities, driven by underlying moral views. Supporters of higher tax tend to think that wealth should be shared, and that the rich should pay more than the poor. For them, the 50p tax is a matter of fairness as well as economic good sense.
Supporters of the lower rate disagree. They say that the rich have earned their higher salaries by working better and harder. There is no reason, they argue, why success and wealth should be penalised through higher tax.
- If you were a top earner, how much tax would you want to pay? What would be a fair rate?
- Do rich people deserve their money?
- Write and deliver a political speech, arguing either for or against scrapping the 50p tax rate.
- Imagine two extreme societies: one is Communist, in which all income is taken by the government and shared equally. The other is ultra-capitalist, in which the government takes no tax at all. What problems do you think each society would have? Would one be better than the other? Draw up a chart to illustrate the differences.
Some People Say...
“If you've earned your millions, why should you pay them to the taxman?”
What do you think?
Q & A
- So rich people pay more tax than the poor?
- In theory yes, although some very rich people are quite good at paying as little tax as they can. The general idea is that taxes should be 'progressive'.
- Meaning what?
- Progressive taxes are more expensive for the rich than for the poor. Regressive taxes are the opposite – where they cost poor people a greater share of income than they cost for the rich.
- Any examples?
- Income tax is progressive because the rates go up as your income increases. VAT and other consumption taxes are regressive because poor people buy more consumer goods (on which VAT is charged) relative to their incomes.
- 50p rate
- This slightly misleading term obviously doesn't mean that people only pay 50p in tax. Rather it means paying 50p per pound, i.e. 50%.
- Shadow Chancellor
- In the UK parliamentary system, each minister has an opposition counterpart who is responsible for criticising and reviewing their actions. The Shadow Chancellor is responsible for the economy and for fiscal policy.
- Competition fundamental to the capitalist system. When services (including those that governments provide) become more expensive and less high quality than those offered by rivals, they are uncompetitive. Uncompetitive bodies lose business.