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50p tax is set to lose billions of pounds and push away a generation of wealth creators
That is the finding of a new report into the impact of Britain’s high-rate marginal tax on Treasury revenues.
The Centre for Economics and Business Research’s (Cebr’s) report, ‘The 50p tax- good intentions, bad outcomes,’ released today, examines how the revenue maximising rate of Income Tax has changed since the 1980s. It has found that:
A new generation of wealth creators have new legal choices because of digital banking and a creative wealth management industry which can mean that while their money is abroad, they can remain working in the UK.
New financial products now allow individuals to minimise their exposure to the 50% rate of Income Tax.
Britain has lost its place an attractive, low-tax jurisdiction that welcomes wealth-creators and has become one of the most punitive. Since 1997 the UK has already dropped from 4th position to 95th in the World Economic Forum’s tax competitiveness ratings.
Other European countries are competing in a silent auction for the tax from high earners.
There is a danger that the 50p tax – combined with higher NICs and VAT, and restrictions on pensions – pushes British taxes over an important psychological threshold that breaks the covenant that wealth-creators feel towards their domestic tax regime.
Britain’s 270,000 major wealth-creators- the top one per cent of income-tax payers- contribute around £40bn of income tax a year, 25% of the £163bn paid in income tax to the HMRC in total. Cebr’s report suggests that a combination of higher VAT, higher National Insurance Contributions, and increased labour and capital mobility will push Britain’s wealth-creators to utilise new tax-minimising opportunities and move their wealth elsewhere, leaving a vital gap in Britain’s revenue used to fund public services.
Furthermore, Cebr’s calculations suggest that the revenue-maximising top rate of Income Tax is likely to be less than 40% and that any taxation above this is likely to cost the Treasury billions of pounds over the coming years. It predicts that even a conservative increase in the taxable income elasticity from 0.46 to 0.50 would reduce the revenue maximising top rate of income tax to just 36% suggesting that the current 50% rate of income tax does not raise any additional revenue for the government.
Doug McWilliams, the founder and Chief Executive of Cebr, commented;
“Increased globalisation and easy access to wealth management services are enabling Britain’s wealth creators to minimise their tax liability in the UK. Our latest report concludes that the higher rate 50p tax pushes Britain’s wealth creators past a psychological threshold that makes them more likely to explore and make use of these methods. In the long term this could have devastating consequences for Government revenue as more money is likely to be lost rather than gained by the higher-rate tax. Our projections show that the 50p tax is set to lose the Treasury more than a billion a year by the middle of the decade.”