The 50p Tax Rate: It's Not a Good Scrap

06/03/2012 21:54 GMT | Updated 06/05/2012 10:12 BST

The 50p tax rate is a divisive little issue, to say the least. The age old adage that "the only certainties in life are death and taxes" is wearily trotted out on every payday across the land.

With things as tight as they have been at home, we all live in hope that the sizeable chunk of our pay packet which we lose to the taxman every month is going to be spent on something worthwhile. That sentiment persists regardless of which tax bracket you currently occupy.

The solution to the current financial crisis was originally touted as one that could be solved via monetary policy. Interest rate cuts would stimulate demand, getting lending going in the process, and a couple of wobbly quarters would be a small price to pay for the overall recovery. However, as the crisis has dragged on, and instead became an economic and not a banking centred issue, the fiscal policy lever, tax and spending, was then pulled by western governments. Some went for stimulus (the US) and some, such as the UK, went for the painful medicine of austerity and tax rises.

The 50p tax had, of course, been a Labour plan and was introduced by Gordon Brown to try and raise tax revenues in the face of evidence of increased levels of tax avoidance. However, it has now become a 'stick' with which politicians continue to hit each other with. Those who would like to see it scrapped are accused of being "enemies of the poor" (or even, god forbid, "friends of bankers") whilst those who want to keep it are portrayed as "money-grabbing Stalinists" and accused of jeopardising the future of the UK's entrepreneurial spirit. It's all been reduced to Punch and Judy stuff, which is hardly constructive.

The common belief for those who want to scrap the tax is that the creation of new working opportunities will be hampered by a 50p rate. The argument goes that highly qualified specialists from abroad, who would command salaries of over six-figures, will instead go somewhere else to pursue their ambitions, scared off by the prospect of losing half of their income in the UK. Small to medium sized businesses (SMEs) will therefore struggle, and growth will slip as a result.

Well, to join in the seditious debate, let me suggest that this argument is a "load of old tosh". Or at least some of it is. If you want to do something beneficial for businesses, a tax cut for the rich is not what you should be wishing for. There are other devices which will work much better.

It is true to say that SMEs occupy the 'engine room' of the British economy and that the recovery will be built on their backs. However, to suggest that the 50p tax rate is the major reason for the underperformance of these companies is ignoring a larger issue.

Since the first cracks were seen in the veneer of the banking sector, funding of SMEs has been an issue. Overdrafts were cut, loans were called in, and the credit lifeblood of these companies was drained instantaneously. More businesses have gone bust as a result of a lack of credit than any that could ever have been set-up even if the top rate of tax was still only 40p. The 'credit easing' plan announced last year - and due to be fully unveiled this month - will hopefully provide more of a tonic to business than a tax cut for its employees could ever achieve.