Tax war rages on

THE WAR surrounding the potential abolition of the 50p top rate of tax has been raging for the past couple of months.

The rate, introduced by former chancellor Alistair Darling in the 2009 Budget, was only ever meant to be temporary. However, the coalition government has said no decision will be made on its abolition until 2012, after the yields from the first year of its implementation are confirmed by HM Revenue & Customs (HMRC).

This has not stopped debate. The abolitionists won a battle in September when 20 leading economists wrote to the Financial Times claiming that the rate was a hindrance to economic growth. However, the pro-top rate faction immediately hit back with figures from a parliamentary question in November 2010, which showed that the Treasury estimates for the revenue generated by the 50p tax rate stand at an extra £12.6bn over five years.

The only thing we know for certain about the estimated increase in revenue from the 50p rate is that we actually know very little. Without even looking at the political environment – which is arguably more important than the economic aspect in this debate – this is a minefield.

Despite the widespread interest in the letter that appeared in the Financial Times, little attention was paid to the actual economics, except for a few references to the UK being “less competitive” and people moving abroad. But these are unknowns. In this respect, it is quite sensible for chancellor George Osborne to wait until HMRC publishes its figures in early 2012 before making a judgement.

And even then, it will be hard to make conclusive judgements. There will still be the many unknowns: how many people have been put off from coming to the UK, is it a factor in making businesses stay away, would less tax avoidance have taken place if the 50p rate had not been in place, and the list goes on.

Until 2012, however, headline estimates will not be helpful. The abolition of the 50p rate could well come down to politics, rather that economics. The HMRC figures will likely be interpreted depending on people’s original standpoint, and it may be a matter of faith in entrenched economic beliefs and not of empirical evidence.