What tax rate is too high?
I was on Iain Dale’s LBC radio programme on Sunday, talking about Labour’s tax policy. I said I was in favour of a mansion tax in principle. Jonathan Portes, of the National Institute for Economic and Social Research, was also on and explained why a land tax (of which a mansion tax would be a progressive form) was economically efficient, so I agreed with him.
But we were diverted into a discussion of Francois Hollande (pictured), and whether a 75 per cent tax rate on incomes over €1m (£870,000) a year would really stifle an economy such as Britain’s or France’s. (Note that the French finance minister on Monday hinted that the new tax on the richest might not be at a 75 per cent rate after all.)
At which point my secret inner Blairite (did you know?) was activated. I said that, while a 50 per cent rate was acceptable in an emergency for a short time, it was the limit. I was slightly surprised to discover that I had a philosophical rather than a revenue-maximising objection to tax rates above 50 per cent.
I think half for the common endeavour and half for the individual is a high as tax should go. In which case, my principle is being breached, and by a Conservative-led government, as the top rate of income tax is currently 52 per cent (income tax and National Insurance combined) and, taking the tapered withdrawal of the personal allowance into account between £100,000 and nearly £120,000 a year, 62 per cent. (The philosophical objection does not apply to combined rates of tax or NI and benefit withdrawal, because cutting benefits received from public funds is not the same as taking someone’s own money away from them; but high rates of combined tax and benefit withdrawal are obviously undesirable on incentive grounds.)
On this, I have changed. I remember being amused around 1988, when Nigel Lawson cut the top UK rate from 60 per cent to 40 per cent, by an American student, who seemed quite well-off, declaring that she would feel “absolutely suffocated” by a tax rate of 60 per cent.
Now I think she had a point.
It emerged from an ensuing discussion that some people do not know or believe that the top marginal rate of income tax under the Callaghan-Healey government 1976-79 was 98 per cent.* Denis Healey raised the top rate of income tax from 75 per cent to 83 per cent, and then applied an “unearned income surcharge” of 15 per cent on interest. The 15 per cent investment income surcharge was abolished (page 8 note 4) only in 1984. Nor had I remembered that the top rate of normal income tax had been 75 per cent for years before that, including throughout the 1970-74 Conservative government.
*Nor was 98 per cent the highest-ever marginal rate in the UK. The HMRC website says this was 136¼ per cent on interest income in 1967-8. I doubt if anyone paid it.Tagged in: 50p rate, 50p tax, income tax, inequality, redistribution
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