The economics of envy

A group of twenty economists have written to the Financial Times to urge Chancellor George Osborne to repeal the top 50% rate of income tax as soon as possible, on the grounds that it is causing "lasting damage" to the economy. Surprisingly, to me at any rate, the signatories are not the swivel-eyed gang of Laffer/Wanniski wannabes that you might expect. They include DeAnne Julius, always among the doves on the Bank of England MPC when she served there, and Cambridge professor Bob Rowthorn, who in earlier life was an outspoken Marxist.

It would be good to think that a decision on this issue could be taken purely on the basis of evidence as to its likely economic impact. Chris Dillow has already done a very good job of examining the evidence on his blog, and finds the case that the 50% rate damages the economy to be unproven, to say the least. A good number of commentators have pointed out that few entrepreneurs wind up paying much income tax anyway, since they tend to be compensated through capital gains or dividends or, in many cases, offshore. The 50% rate falls mainly on city workers, most of whom have little flexibility to move elsewhere just to avoid taxes, at least in the short to medium term. (Only about 320,000 taxpayers, or about 1% of the total, pay any tax at the top rate).

But enough of the facts, because the early evidence from some quarters, especially the LibDems, is that this issue will be decided by the politics of envy more than anything else. One senior LibDem has said that dropping the 50% rate would be "phenomenally immoral", inspiring this response on Twitter:

Cutting 50p tax would be "phenomenally immoral" says phenomenally pious Lib Dem Tim Farron. Even if it brought in more govt revenue?

Another LibDem ventured onto the BBC news to point out that in France and Italy, the "super rich" (his term) are volunteering to pay more tax, while over in the US, Warren Buffett (now down to a lowly fourth on the global wealth league table, but presumably still just about "super rich") regularly decries the fact that he pays a lower tax rate than his secretary. "Only in the UK", quoth the LibDem, "are the super-rich super-greedy". It must be said that if the LibDems think that a £150,000 income (the starting point for the 50% rate) makes you "super rich", or puts you in anything like the Warren Buffett wealth bracket, then they definitely need to get out more.

Still, as Chris Dillow concludes in his piece on the subject (linked above), "To worry so much about the 50p tax rate at a time when real incomes are being squeezed, unemployment is rising and some benefit claimants face real hardship is to display a rather warped set of priorities". Much as Osborne might want to axe the 50% rate, which is anathema for most of his party, it's a non-starter in current circumstances. He'd probably rather Comrade Rowthorn and his pals had made their representations in private, rather than splashing them all over the FT and exposing yet another faultline in the coalition government.