Remember the economy? Looking at the debate about the 50p tax rate gives me the impression that people have forgotten it. This is because the debate is being framed solely in terms of whether the rate raises revenue or not. But this is not the same as the effect it has upon economic growth.
It’s perfectly possible in theory for the tax to raise revenue but to stifle growth. This would happen if top tax-payers reduce their productive activities in response by the tax, but not in aggregate by so much as to fully offset the higher tax rate they pay.
It’s also possible for the opposite to happen. Let’s say - for the same of argument - that the 50p rate does raise only “hundreds of millions” rather than billions. This could be consistent with the 50p rate being positive for GDP growth. This would happen if:
- the new rate triggers widespread tax avoidance or evasion by people who carry on working as before.
- some other people respond to the rate by working harder, as the income effect offsets the substitution effect.
- insofar as the higher tax rate does deter some others from working, it deters them from activities with negative externalities, such as office politicking, political lobbying, or entering careers such as banking which have large negative externalities.
There is one colossal fact which is consistent with this hypothesis. This is that in the 23 years since Nigella’s dad cut the top tax rate to 40p, real GDP grew by an average of 2.1% a year, compared to 2.4% per cent a year in the previous 23.
Now, you could object to this that lots of other things affect GDP growth too. But opponents of the 50p tax rate are in a weak position to do this. For one thing, if they are to engage in simplistic post hoc ergo propter hoc reasoning when they claim that Lawson’s tax cuts led to a rising share of income tax being paid by the richest 1%, they can hardly moan when others engage in such reasoning. And for another thing, defenders of the 50p rate like to think that other reforms of the Thatcher era boosted the economy. Which makes the slower GDP growth since then all the more troublesome for them.
I don’t say this to take sides. My point here is rather that looking only at the impact on tax revenues is to take too limited a view of the impact of the 50p rate. And the passions in the debate seem rather stronger than the evidence base.