Fraser Nelson
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Mountains of data from scores of countries have shown this to be true. The renewal of Britain’s prosperity started in 1979 when the top rate of tax was lowered from 98 per cent to 75 per cent. But the rocket boosters were applied in Nigel Lawson’s 1988 budget which cut the top rate of tax from 60 per cent to 40 per cent (with cuts for the lower brackets, too). On that occasion, the young Alex Salmond was thrown out of the chamber after denouncing it as ‘an obscenity’. Mr Brown himself was shushed by the Speaker, so vocal was his pious indignation.
Yet paradoxically the 1988 Budget can be seen as the most redistributive taxation package in British postwar history, with consequences that ought to have suited any rational Labour politician looking for revenue to spend on public services. Then, the richest 1 per cent of households were contributing a handsome 14 per cent of all income tax collected. By 1997, this had soared to a staggering 21 per cent — given an incentive, the rich work more and declare more. The subsequent boom may have generated more unlovable Gordon Gekkos than it did popular Richard Bransons — but 40 per cent of the extra money they generated still accrued to the government.
The Lawson legacy was sound, its logic apparently unquashable. Never had the richest borne a greater share of the burden. As a nation we had — it seemed — reached a philosophical conclusion about a basic question of human economy and social organisation that had hitherto separated left and right. Was Britain’s problem that the rich had too much money? Or that there were too few such wealth-creators? Should we see the rich as antisocial hoarders of money, to be raided in hard times, or as cherished, job-creating taxpayers (often guests in this country)? Tony Blair was emphatic which side of the divide New Labour stood on. As Mr Blair understood, it is the expectation of tax rises to come, not just the experience of their practical impact, which sends the golden geese flying off to Singapore or Dubai. Indeed, this principle seemed well entrenched: top tax rates the world over have fallen for the last decade. Dubai established itself as a financial centre with no income tax and watched wealth spring forth from the desert. A new, invincible orthodoxy appeared to have arisen. But in politics, as in life, nothing is truly invincible unless it is properly protected, explained and justified.
In recessions, faith in the free enterprise system is naturally shaken. There is an economically illiterate but emotionally powerful temptation to return to the zero-sum logic of the Old Left: namely, that a £5 billion hole in the accounts can be filled by a £5 billion tax rise. But people respond to incentives and disincentives in recessions, too. Why work for the taxman? That is the crucial psychological question that all who are affected by the 50 per cent bracket — or fear they will be — ask themselves. In practice, a higher tax rate means the taxman will simply take a larger slice of a smaller pie.
All this perhaps explains why sales of Atlas Shrugged, Ayn Rand’s classic novel, are rising once more. The under-40s have turned to fiction to find tales of what happens when governments are stupid and desperate enough to come after the job-creating entrepreneurs. The wealth creators behave rationally and slow down their efforts — and the economy collapses. Even Russia, Ms Rand’s motherland, has lowered its top rate of tax to 13 per cent in a hugely successful bid to claw more money from the oligarchs.
How quickly the lessons of history are ignored as each generation rises to take its place at the helm. To raise the top rate of tax to such high levels is to repeat the errors of the 1970s. This is why older Tories, the veterans of those economic wars, are looking on aghast. How can such a falsehood be so widely accepted? The answer, like so many of Mr Brown’s tricks, can be traced back to a false assumption in the Budget itself. The Treasury’s model, deployed in order to assert that the new 50p tax will raise £2.4 billion, makes the assumption that the richest will be no more able or inclined to avoid tax rises than a worker on the average wage. This is patent nonsense, contradicted by all the evidence.
The Institute of Fiscal Studies has a different model, which assumes the 50p tax would inflict a net loss of about £800 million to the Exchequer. But even this calculation is based on 1980s data, and one would expect the super-rich to move much faster in the globalised world of the early 21st cent- ury, in which money can be moved across continents at the click of a mouse. The Centre for Economics and Business Research predicts that 25,000 will leave Britain, destroying 140,000 further jobs.
There is a good reason why Mr Brown does not intend to impose the tax until what will probably be the final four weeks of Labour’s 13 years in office. The tax is electorally popular, but economic lunacy. It is also one big gullibility test for the Conservatives.
So far, it is a test they are failing. David Cameron talks as if he will be able to do nothing about this new Labour tax. But from the moment he kisses hands with the Queen, as her new Prime Minister, he will be personally responsible for every measure used to extract money from the British public. No one now doubts that some taxes will have to rise. But the Tories have a responsibility — to use Cameron’s own favourite word — to work out which taxes will do the least harm: a responsibility that should transcend narrow calculations of popularity. If Mr Cameron thinks the 50p tax will raise money, let him make the case. If not, then he too will be imposing it for the same ‘cynical political purposes’ that Stephen Byers detected in Mr Brown.
So what is the Conservative alternative? The idea of challenging the 50p tax using words like ‘Laffer Curve’ is anathema to them: the last thing they want right now is to be seen as still in hock to the old Chicago school of economics and the ideologues of the New Right. But the irony is that there is no ideology here at all. Even Laffer admits that he did not invent anything: he was trying to teach Rumsfeld a lesson in basic economics that politicians seem to forget every 20 years. Even Keynes observed that ‘taxation may be so high as to defeat its object’. The futility of high tax bands is not a contestable doctrine, but a proven fact.
The Conservatives could certainly abolish the 50p tax if they had the guts to explain, calmly and methodically, that such a measure would raise revenues and lessen the tax burden all round. Such a message would initially contradict popular opinion — but great political leaders have not hesitated to act as teachers. ‘No American is ever made better off by pulling a fellow American down,’ said John F. Kennedy in 1960, as he reduced the top income tax rate from 91 per cent to 70 per cent. Mrs Thatcher carried out privatisations in the face of ferocious public opposition: only later did these measures prove popular. The worst political leaders are those who go with the flow: think of Heath’s U-turn, or Hoover’s 1932 tax rise, which completed America’s conversion from Wall Street crash to Depression.
Internal Treasury documents justify its tax system on the basis that ‘Karl Marx’s progressive tax structure was designed so that the tax burden was heaviest on those who were most able to contribute’. It is remarkable that the Treasury still cites Marx when, to put it mildly, more recent studies are available for consultation. As JFK and Lord Lawson proved, the most ‘progressive’ tax rates lead to the least ‘progressive’ outcomes.
It is worth noting that, in a ghastly new mutation of equality of opportunity, the 50p tax would saddle the well-off with the same disincentives to work which Mr Brown has applied to the poor to such tragic effect. A single mother with two children is given more in benefits than the average female hairdresser or post office worker earns. Little wonder five million were on benefits throughout the boom. Rich or poor, humans respond to incentives. Rich or poor, they ask: why break your back if the government will take away most of your money?
This is why the 50p tax proposal should have been regarded as an utter irrelevance by the Tories, to be discarded with contempt in the first Osborne budget, rather than an unwelcome legacy over which they have no control. The tax itself is bad enough; the broader principle it enshrines is truly toxic and represents a serious impediment to recovery. It also represents a fundamental and wilful misrepresentation of how wealth and jobs are created. It is the dying act of a failed government, and Michael Caine’s threat to go to America will be carried out by thousands of others — software engineers, architects, etc.
Of course, Cameron will repeal it eventually. Every tax raid on the rich leads in time to a government on bended knee, pleading with the wealthy to come back from their economically rational exile. Even the Bolsheviks begged Russians to ‘enrich yourselves’ after the failure of their early economic policy. Lord Mandelson put it perhaps too crudely when he declared that New Labour was ‘seriously relaxed about people getting filthy rich’. All these formulations are polite versions of Gordon Gekko’s ‘greed is good’. Just ask the 85 out of 88 developed countries where the top income tax rate is lower than 50 per cent.
On this occasion, Mr Cameron walked into Gordon’s trap, which was not that the Tory leader would oppose the measure, but that he would accept it. The Prime Minister is bequeathing to a recession-struck nation the fourth-highest top tax rate on the planet, just for the devilish joy of watching a Conservative party too timid to state the simple truth: that high tax rates make everyone poorer. Economically, it is a poison pill. The tragedy is that so many of Britain’s entrepreneurs will not hang around long enough to see whether Cameron swallows it. They know that greed is still good — for everyone. But does the Conservative prime minister-in-waiting?
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