Whatever your opinion of the 50p rate of tax, scrapped in the headline move of last Wednesday’s Budget, one fact is undeniable: it was a legacy of Gordon Brown’s doomed and dying government, desperately clinging on to its last few weeks and months of power. Adopted in 2009, this was a move that violated every principle of modern liberal economics – a philosophy that influenced both Thatcherism and New Labour – and it has proven to be fundamentally incompatible with British society. Taxing the richest is our society is a cancer that destroys entrepreneurship, discourages international investors and, ironically, lowers overall tax yields.
Many economically successful countries have found their models defined by a single crisis, often an economic catastrophe that provoked deep national embarrassment. The German obsession with austerity harks back to the hyperinflation of the Weimar Republic that induced short-term national ruin and precipitated the onset of Nazism. Meanwhile, the emergence of low taxation as economic orthodoxy in this country has been dictated by the crippling effects of our flirtation with socialism in the 1970s. Britain was on the brink of disaster in 1976 when the International Monetary Fund was forced to bailout a bankrupt, post-imperialist backwater plagued by extortionately high taxes – an eye-watering 83% for higher earners. Its timing, a mere 31 years after the Western allies liberated Europe in 1945, only served to rub salt into the wound.
Subsequently, low taxation economics – widely considered to be a beacon of prosperity – became a central tenet of the British political status quo. Thanks to economic liberalism, successive governments have paved the way for London to flourish as Europe’s major financial centre. But over the past few years, the 50p tax rate has made a mockery of the progress enjoyed by Britain over the last three decades.
As argued not so delicately by historian David Starkey on Question Time earlier this month, the debate over the 50p tax rate is fundamentally “a war between the heart and the head”. The argument championed by Labour (and to a lesser extent the Liberal Democrats) dictates that during times of austerity, the rich should pay their fair share. This seems perfectly reasonable. After all, it would appear ludicrous for any government to prioritise the wealthiest one percent, thus violating the fundamental principles of egalitarianism.
Yet this argument is fundamentally illogical. The very existence of the 50p tax rate advanced a powerful political message: Britain is not open for business. It discouraged entrepreneurship amongst individuals and companies alike and ensured that wealth creators became increasingly disillusioned with investing in Britain. Moreover, the policy presented Britain as a nation that deplores hard work, despises the wealthy and is fundamentally intolerant to the notion of success. This is a trademark Britain can do without: now that it is gone, we should applaud the government for removing what was a substantial barrier to growth and prosperity, capable only of tarnishing our well-honed international image as a business-friendly nation.
Perhaps most shocking was the detrimental effect that the 50p rate had on the tax revenues it was supposed to be bolstering. As highlighted recently by the Institute for Fiscal Studies, the top rate of tax actually cost us money; “estimates range from between £500 million to £4 billion a year”, according to the Telegraph. In many ways this is not surprising. As Starkey also noted, when then-Chancellor of the Exchequer Nigel Lawson cut the top rate of tax to 40 percent in 1988, he found that tax receipts from the rich “virtually doubled”. The success of Tory economics ensured that the policy was continued by New Labour in 1997, explaining why Tony Blair himself was, reportedly, vehemently opposed to the 50p rate.
It is only recently that the detrimental effects of this latest tax hike became clear. Notably, talent has been driven abroad. In an age where modern communications allow one to run a company based in London from a sun-drenched tax haven, the appeal of Monaco or Bermuda increases exponentially. Since the government relies on 14,000 millionaires for £14 billion in tax receipts, whilst sixteen of Britain’s twenty wealthiest people are foreign nationals, every effort must be made not to alienate the super-rich; alas, considerable numbers are already swapping rain-soaked Britain for the beaches of Dubai or the hills of Hong Kong.
Britain has become terrifyingly dependent on the elusive ‘1 percent’, and the 50p tax rate only served to rock the boat of an already fragile relationship. Whilst the media and the general public have been quick to pour scorn on George Osborne’s decision to cut the top rate of tax to 45p, it is quite clearly the right thing to do for the state of the British economy in the long term. Forget accusations of ideological dogma – if you cherish anything about the welfare state, it is impossible not to highly value the contribution of the super-rich. Far from being financially hammered, they must be rewarded accordingly.