Should the UK Restore the 50% Additional Rate of Income Tax?

Introduction

The United Kingdom has developed into one of the highest-taxed nations in the world, despite suffering from impaired competitiveness and stifled economic growth. Unlike most OECD countries, which have reduced their tax burdens since 1997, UK taxation has increased — diminishing the country's position as a competitive, low-tax regime. A further characteristic of UK taxation has been the tendency to push taxpayers into higher rate bands, effectively raising tax rates for a growing number of people. In recent years, considerable debate has arisen over whether the UK government should restore the 50% additional rate of income tax. This debate has been marked by arguments both in favor of and against such a move.

Recent History of the Additional Rate of Income Tax

The United Kingdom is ranked among the highest-taxed countries in the world (Young & Saltiel, 2011). This high level of taxation is partly attributed to impaired competitiveness and stifled economic growth. The UK has suffered from a 50% marginal tax rate widely regarded — even by those who designed the policy — as having been introduced without clear economic purpose. According to financial analysts, the policy was set for failure from 2011 onward because of its role in contributing to a decade of flat economic growth and billions of pounds in lost revenue.

In the 2009 Budget, Chancellor Alistair Darling announced several tax increases intended to generate more than £6 billion by 2012. These increases were also designed to secure the country's economic future and provide assistance to those in need. Among the key changes were increases in indirect tax rates and a reform of income tax through the introduction of a new 50% rate on incomes above £150,000. The introduction of this 50% additional rate was primarily part of the coalition government's fiscal strategy to cut the deficit.

The new 50p rate dominated reaction to the 2009 Budget, being viewed as a significant shift in the Labour government's approach to taxing the wealthy (Seely, 2014). Considerable discussion followed over whether the change would raise as much as the government expected — namely £1.3 billion in the 2010–11 financial year, rising to £3.05 billion in the following year.

Despite its stated objective of improving the UK economy, the additional 50p rate attracted considerable negative commentary and controversy. First, critics argued that while the rate carried significant symbolic value, the revenue it would generate would be too small relative to the scale of the public deficit. The 50p rate could raise approximately £7 billion at best, but reducing the deficit to manageable levels would require a prolonged period of unusually high growth. Second, while the measure was praised as an effort to share the fiscal burden, it would do little to close the gap in public finances without being paired with initiatives relating to capital or property taxation. Nevertheless, opinion polls conducted after the 2009 Budget announcement showed widespread public support for the new 50% additional rate.

Implementation of the measure was accompanied by serious concerns and disruptive effects, which ultimately led to the rate being reduced to 45p. One concern was the tendency of companies to pay employees early in order to avoid the new 50% rate. Other concerns included the severity of the economic recession and the ongoing deterioration of public finances. By March 2012, HM Treasury had gathered substantial evidence that the rate was generating significant distortions. The Office for Budget Responsibility reported that the cost of reducing it to 45% would be relatively minimal, and this finding led to the rate being cut from 50% to 45%.

Arguments in Support of Restoring the 50p Rate

In recent years, proposals have emerged for the re-introduction of the 50% additional rate of income tax. One contributing factor was the claim that the coalition government made an unjustifiable and widely unfair decision to reduce the rate from 50p to 45p, since the reduction primarily benefited those earning over £150,000. Some financial experts argue that the additional 50p rate was removed prematurely and should be restored so that its full impact can be properly assessed. These proposals have attracted considerable debate, characterized by competing arguments for and against.

Reducing the Deficit

The first argument advanced in support of restoring the rate is the need to reduce the country's substantial deficit. Proponents argue that addressing the deficit requires reversing the coalition's decision to lower the rate to 45% (Urquhart, 2014). Restoring the 50% rate, they contend, would ensure that the country's highest earners contribute a fair share toward reducing the budget deficit. In a period of a rapidly rising deficit and difficult economic conditions, the government cannot afford to extend large tax cuts to the wealthiest members of society. This was the central rationale behind the original introduction of the rate in 2009, and its proponents maintain that the same logic applies today.

Fairer Share of the Burden

A second argument holds that restoring the rate would contribute to a fairer distribution of the fiscal burden across the UK population. As the economy continues its gradual recovery, additional measures are needed to address underlying economic challenges — and those measures should require that those who earn the most contribute proportionally more, rather than benefiting from larger tax reductions than others. Implementing the 50% rate would signal the Labour government's commitment to a fairer taxation system.

Generating More Revenue

Restoration of the 50% additional rate is also supported on the grounds that it would enable the government to raise additional revenue. It has been estimated that the move could help the Labour government generate an extra £10 billion in tax over the three-year period when the rate was first in effect (Goodley, 2014). However, Treasury officials have noted that the additional £10 billion would not necessarily result solely from the reimposition of the 50% rate, but also from the fact that more people were earning higher salaries during that period than originally anticipated. Proponents argue that restoring the rate would help rebuild the UK's economic credibility.

Conclusion

The UK government implemented a 50% additional rate of income tax between 2009 and 2013, before reducing it to 45% following an analysis of its economic impact. Current proposals by the Labour government to restore this rate have generated considerable controversy, with arguments both for and against the move. While restoration is advocated on the grounds that it would reduce the deficit, establish a fairer taxation system, and generate additional revenue, the available evidence suggests that it is unlikely to deliver these outcomes. The UK government should not restore the 50p additional rate of income tax because it is more likely to produce damaging economic effects than to foster growth.

There is no compelling economic evidence that raising the income tax rate would increase government revenue. Furthermore, it is evident that lower tax rates tend to produce higher yields compared with high rates, which burden businesses and suppress economic activity. Restoring this rate would therefore damage the UK's economic credibility, reduce its competitiveness relative to other OECD countries, contribute to greater inequality, and harm businesses and the broader economy.

References

Goodley, S. (2014). Labour's 50p tax rate: what you need to know. The Guardian. 26 January 2014. Available at: http://www.theguardian.com/money/2014/jan/26/labour-50p-tax-rate-what-you-need-to-know [Accessed 4 December 2014].

Merrick, J. (2014). 'Labour will bring back 50p income tax for earners' says Ed Balls. The Independent. 25 January 2014. Available at: http://www.independent.co.uk/news/uk/politics/labour-will-bring-back-50p-income-tax-for-top-earners-says-ed-balls-9084983.html [Accessed 4 December 2014].

Nelson, F. (2014). Why Ed Balls is deceiving us about his plans, and the 50p tax. The Spectator. 25 January 2014. Available at: [Accessed 4 December 2014].

Seely, A. (2014). Income tax: the additional 50p rate. UK Parliament website. Available at: http://www.parliament.uk/Templates/BriefingPapers/Pages/BPPdfDownload.aspx?bp-id=SN00249 [Accessed 4 December 2014].

Urquhart, C. (2014). Labour will restore 50p top rate of income tax, says Ed Balls. The Guardian. 25 January 2014. Available at: http://www.theguardian.com/politics/2014/jan/25/labour-50p-top-rate-income-tax-ed-balls [Accessed 4 December 2014].

Young, P. & Saltiel, M. (2011). The revenue and growth effects of Britain's high personal taxes. Adam Smith Research Trust. Available at: http://www.adamsmith.org/sites/default/files/resources/high-personal-taxes.pdf [Accessed 4 December 2014].