If the Chancellor thinks that the reduction in the top rate of tax from 50p to 45p will bring in more money, then why is he waiting until 2013 to impose it?
As I wrote a few weeks ago, as counterintuitive as it may be, it is possible to make an economic case for cutting income tax for people who earn £150,000 plus a year. The theory runs that if the rate is lower, fewer people will take steps to avoid it, thus total revenue to the Exchequer is increased. Yet this is fairly wonkish economics and, as such, a hard sell to the majority of the electorate – who are more likely to see a thundering tax cut for the rich while they themselves are struggling.
In any event, assuming the Chancellor is right that cutting the 50p rate will boost revenue to the Treasury (and this is hard to prove, given that we have no real-life control test showing what would have happened had it not been in place), he has two sensible courses of action. First, he could manage by maths: cut the rate – entirely and immediately – take the popularity hit but bring in more cash. Second, he could manage for image: retain the rate, enjoy more popularity and accept that total revenue will be lower.
With today’s fudge he has managed to upset both camps. He has merely reduced a rate that he believes shouldn’t exist at all. And he has compounded the problem by delaying its imposition, despite the fact he claims it is losing the government money. It’s akin to saying, “we’ve got a leak in our bath, so we’ll patch it up, but only half of it – and we’ll do it next year.” It’s a baffling resolution.
A big thanks to George Bull, tax expert at accountancy major Baker Tilly, who predicted weeks ago that government would do a complete u-turn on its misconceived child benefit cut. That has happened. The result is rather bizarre fix that sounds so complex (if slightly fairer) that it may cost so much to administer it will be barely worth doing at all. I cannot help thinking the government would have been better abandoning the idea entirely and raising the money somewhere else.