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February 23, 2011

Lefties + economics + 50p rate = confusion.

The news, yesterday, that January saw the UK’s biggest monthly surplus for nearly three years – better than even the most optimistic of expectations – has caused lefties a bit of headache. How on earth, you can imagine them asking themselves, do we deny the government the credit and portray this as evidence that we were right all along? Step forward Duncan Weldon, economist, Labour Party member and Guardian blogger. He says that the unexpectedly large surplus is evidence that “the 50p tax rate is paying us dividends”. Aha! Of course! The surplus is all thanks to Labour’s bashing of the rich! Hurrah for an extortionate top rate of tax! Hurrah for all our businessmen considering emigration! Hurrah for socialism! Et cetera…

Except, of course, it’s utter nonsense. The reason that January always sees a higher-than-normal tax revenue is that it’s the month in which self-assessments have to be completed. It’s the month the self-employed pay their tax. And, of course, those self-employed people who paid their tax last month were paying it on their 2009-10 earnings and therefore paid 40% tax, not 50%. As Fraser Nelson suggests in his excellent Spectator article, this surprise tax haul can probably be better explained by people sucking forward their income to avoid the 50p rate – as any sensible person would. The real way to increase tax revenue from the rich is to have more people paying less, not fewer people paying more. That’s why so many countries have cut – or, at least, not increased – their top rate of tax in the last few years (see table, stolen unashamedly from Nelson’s article):

This is also why Boris has been so keen to press for the 50p rate to be scrapped. He understands the benefits – the benefits to all, not just the rich – of a low-tax economy, a buoyant City, a thriving business sector, higher employment and London remaining the financial capital of the world. When Ken Livingstone suggests that Boris is simply ‘protecting the richest’, he reveals his own economic knowledge to be worryingly limited.

[UPDATE: I'm always happy to offer the right of reply. Duncan Weldon tweets in response: "Worth noting Nelson is wrong on SAE. Check HMRC guidance. Payments on account subject to 50p rate."]

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