Britannia Radio

Saturday, 21st March 2009

A 45p tax rate is not what's best for this country

FRASER NELSON 7:05pm

It has taken five months but George Osborne has finally fallen into the trap Gordon Brown set for him when he proposed a new 45p tax on the richest. Without prompting on The Today programme this morning, Osborne said:

“If you look at the proposal to increase the top rate of tax for people earning £180,000, a new 45% rate, I've said that's going to be difficult to avoid and I think that is just a statement of the truth.”

Difficult to avoid if you have no imagination. It’s not a statement of truth, but a depressing snapshot into the Tory thought process. “If we do x, Gordon Brown will say y, so we should do z instead.” In this case, they thought “If we oppose the 45p tax Brown will say ‘few not the many’ so we’ll not fall into his trap, in fact we’ll really fox him and back his 45p tax! What’s more, we’ll hint that we’ll tax the rich as well!”

What about asking “What is good for the country?” What about the economic case for it – is it so compelling that the 45p tax is “difficult to avoid”?  I’m not against any tax rises: I consider them grimly inevitable. But even the IFS says that the 45p tax would not raise any revenue. Why? As the IFS said at the time: “People will contribute more to their private pensions. Convert more income into capital gains. Emigrate. Work less.” Basic reasons of dynamic tax modeling. There is a reason why the top rate of tax has been falling around the globe: governments get more revenues that way. Even Brown realised this. He kept to the 40p upper limit precisely because of his hunger for tax revenues.

The 45p would give Britain one of the highest marginal rates in the developed world – and what message would that send out about the intentions of the new Tory government? Brown only proposed it as a ploy. Sure, if they opposed it, Brown would indeed say “ha! They want to save their banker mates”. But what the Tories really don’t seem to realise is that he will say these things anyway. If they embraced it, it would send a signal to their own supporters that they don’t understand the basics of wealth creation. It would look like a cynical ploy to head off a Brown attack – which is exactly what it is.

So what would I have Osborne do? Lord Lawson put it perfectly in his interview with me (full transcript on The Spectator Inquiry wiki page here):

“They should be careful not to make any commitments between now and then. They will need, more or less, a doctor’s mandate. Until we get in we don’t know what the situation is going to be like. So we not only have to wait 15 months or whatever it is but we also have to see the books. We can’t make any commitments now at all.  All bets are off, we have just got to deal with the situation we inherit in the best possible way and get us out of this mess.”

It may be against Osborne’s nature but he should simply not engage Brown in any of his tricksy wee games. Osborne should make no comment at all on the 45p tax, regard any Labour post-election tax plan as an irrelevance.

So where are we now? Let’s compare the two parties. Under Brown you have a determination that spending must go up, regardless of the tax base, a 45p tax for the richest, but spending still virtually frozen (a real terms rise of 1%) and national debt breaking the £1 trillion mark, up from £526bn in 2007-08. The Tories propose…. Oh, exactly the same. Except their rise will be between 0 and 1% - probably more like 0.3%.

As I say in my News of the World column tomorrow, that’s not a change. That’s an echo. Or, as David Cameron might have put it, a “cosy consensus”. In the good old days, Brown stole Tory tax ideas. Now it’s the other way around. The Tories still seem shackled in the pre-crash thinking. Yes, no UK government has really cut real terms spending for more than a year or so – but spending has never risen as quickly as it has in the last seven years. A recession this big has never happened in our postwar history. Deficits of 12% of GDP are new. We need new thinking, to break out of the parameters that Gordon Brown has set. It’s time to stop playing chess with him, and start thinking “what is best for the country?” And if anyone out there can explain why a 45p tax which raises no revenue is such an irresistibly good economic idea, I’d love to hear it.