THE BLOG
07/09/2011 20:14 BST | Updated 07/11/2011 05:12 GMT

The 50p tax Sends the Wrong Message to Entrepreneurs

George Osborne should ignore the political pressures for maintaining the 50p tax. If we want Britain to succeed in the global economy, our growth message should be that entrepreneurialism and aspiration are welcome in the UK indefinitely.

The British debate about 50p tax has generated some of the most inspiring political rhetoric of our times -- and some of the worst economics.

Yesterday, Ed Balls, the Shadow Chancellor, said it was not the right time to ditch the 50p tax rate, particularly "if we really are all in this together". Tim Farron, the Lib Dem President, said scrapping the 50p rate would be "phenomenally immoral and send an appalling message to the overwhelming majority of hard-working people in this country".

In Britain as in Europe and the United States, recovery depends on business investment and private sector job creation. Governments do not have the resources or the instruments to engineer recovery.

I acknowledge that many people are concerned about rich individuals who have made money at the expense of the community. So am I. But that is why we have competition regulation and financial regulation. If these do not work well, the answer is to make them work better. The answer is not to confiscate income from every high earner in order to ensure punishment of an undeserving few. This cannot lead us back to sustainable growth or a healthy society.

As the OECD's report on sustainable policies for growth pointed out last year, the 50p rate should be reduced because high taxes "adversely affects incentives and entrepreneurialism". Business expansion means job creation, the most important condition for lifting low-income families out of poverty. Higher earnings mean more revenue for the Treasury, essential for reducing the national debt and paying for investment in public services such as schools and hospitals.

Economic history tells its own lessons. Advances in science and technology and changes in consumer tastes are creating business opportunities everywhere. To exploit them, businesses need a stable, predictable environment, with clear boundaries between public and private property. Part of this is a stable fiscal regime. "Temporary" tax grabs undermine predictability and clarity and create uncertainty government intentions for the future, when investments made today will pay off.

From this point of view the 50p tax rate has a significance beyond itself. It was a signal - and a bad one. It should not have been introduced in the first place, and there should be a clear commitment now to remove it. Our present indecision risks turning away an entire generation of wealth-creators and investors from the UK.

Those supporting its retention of the 50p tax should remember the "brain drain" of the 1970s. They should remember that lower rates also increase the incentive to earn (and thereby pay taxes).

Today's global economy makes competitive income taxes more important than ever Treasury officials made this point to former-Chancellor Alistair Darling in 2009. And the Institute for Fiscal Studies have made it again more recently. Darling himself acknowledged it: "In the long run you have got to keep your tax rates internationally competitive, which means something like the lower rates we used to have".

Worryingly, recent data from last year's World Economic Forum ranks the UK at the bottom of its international table of tax incentives for hard work, a worrying 95th place.

George Osborne should ignore the political pressures for maintaining the 50p tax. If we want Britain to succeed in the global economy, our growth message should be that entrepreneurialism and aspiration are welcome in the UK indefinitely.