50p tax rate

There is quite a lot of debate about whether or not to get rid of the 50p tax rate that was introduced recently. This 50p tax only comes into effect if you earn more than £150000. One argument for getting rid of this is that it doesn’t bring in much income. I did a quick calculation using an approximate income distribution and as far as I can tell it brings in about £30 million, so not a substantial amount of money. The argument for scrapping it is that it doesn’t bring in much and it might be discouraging investment.

If you go to the Wikipedia page for the UK’s income distribution and page down to the section on Taxable Income you see a table showing the number of taxpayers in various income bands. 300000 people earn between £100000 and £200000. The 50p rates only affects those earning above £150000. If half of these people are earning over £150000 then about 150000 will be paying 50% (instead of 40%) tax on between 0 and £50000. Those at the top of this income bracket will therefore pay about £5000 more than they would if the 50% tax bracket was removed. Not a huge amount considering their high incomes. There are 89000 people with incomes between £200000 and £500000. The 50% tax rates means they pay between £5000 and £25000 more than they would if the top rate was 40%. A lot of money, but no more than 5% of their total income. There are only 22000 earning more than £500000 (6000 of whom earn more than £1000000).

For those on incomes of £1000000 or more, the 50% rate means that almost 10% more of their total income is paid in tax than would be the case if the top rate was 40%. This is both a lot of money and quite a large fractional increase, but I don’t really care. It doesn’t effect a lot of people and they’re not exactly left destitute. The last 30 years has also seen the income distribution become quite skewed in favour of the highest earners. To have a viable economy, you need consumers and if the majority of the population are getting an ever decreasing fraction of the total income, the number of people who have disposable income decreases and the economy falters (unless you lend these people money and then everything crashes horribly a few years later when they start to default on their payments). I believe we need to try and redistribute income more evenly, not necessarily because it is fairer, but because it’s the only way to sensibly provide people with money to spend. They only way I can see this happening is to have a tax system that discourages paying really large salaries.

Those proposing to remove the 50p rate will argue that this high rate discourages investment. The problem I have with this argument is that this is a tax on income, not on capital gains. The people being taxed are employees of others, they’re not the entrepreneurs or the investors. In a sense it doesn’t really make any difference to the investors and business owners. If anything, paying their highest earning employees slightly less may be of benefit to them and to us. I think the 50p rate sends the right message and I hope they don’t decide to get rid of it anytime soon.

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One thought on “50p tax rate

  1. Pingback: Mansion tax | To the left of centre

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