08 September 2011

Why Harry Phibbs should wait for the evidence on the 50p tax band

In a typically pugnacious and ideological piece in today's Daily Mail, Tory Hammersmith & Fulham councillor Harry Phibbs argues that the 50p tax band should be ditched "to show Britain is open for business". He quotes a letter from 20 economists in yesterday's Financial Times to support his argument that the tax punishes wealth creation and may driver higher earners to live abroad.

It's a superficially attractive argument until you look at the facts, as today's Financial Times does here. The FT points out that:
·        There will be no real evidence about the impact of the tax after next January, once tax returns have been filed and analysed
·        The 20 economists "were unable to point to an exodus of entrepreneurs and talented workers when they made their case"
·        Using historical data to support the case for abolition is questionable.

In short, there is a woeful lack of evidence to support the claim that the 50 rate is damaging the country's competitiveness. It may prove to be or it may prove not to be. But as matters stand today, calls for its abolition are the fruit of conjecture and ideology.

Common mistake

Perhaps Mr Phibbs thinks the 50% rate applies to the whole of your income. That’s a common misconception. It actually only applies to any earnings over £150,000, which used to be taxed at 40% (along with all income over £35,000).

For example, say you are a council chief executive and you earn a basic £270,000. You now pay 50% on the amount you earn over £150,000, ie on £120,000. Before, you would have paid 40% tax on that amount.

Admittedly we're no accountants, but it seems to us that before the 50% rate came in, this means you would have had £169,000 a year to spend after tax. Now, you have £157,000 a year. You are £12,000 down but still have £13,000 a month spending money.

On a pre-tax income of £270,000, tax rates and post-tax income (spending money)

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