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Monday, 15 August 2011

50p tax rate

So the Chancellor believes that we should consider scrapping the 50p higher rate of Income Tax. This is payable on income above £150k per annum and covers around 0.5% of UK taxpayers.

We have had a flurry of the usual suspects, in an obviously concerted move this morning, to wheel out the arguments. Even a Tory MP from England on BBC Scotland. Credit to Stewart Hosie MP for pouring scorn on his arguments. The tax rate is not competitive, tax efficiency, avoidance and evasion, and the most laughable, they will all flee the country. Even a large degree of scepticism it would appear from the other side of No.11, with Danny Alexander and other Lib-Dems sounding less than enthusiastic.

Of course the Cabinet millionaires will emphasise the tax efficiency argument rather than the role tax has in redistribution. The High Pay Commission has predicted a massive increase in top-end incomes over the next 20 years. Those earning £150,000 or more a year currently represent just 0.5 per cent of the population, controlling 5 per cent of national income. But trends suggest that figure will rise to 14 per cent of the national income - one in every six pounds earned - by 2030.

Even Adam Smith in his book A Theory of the Moral Sentiments said:

"The disposition to admire, and almost to worship, the rich and powerful, and to despise, or, at least, to neglect persons of a poor and mean condition, though both necessary to establish and maintain the distinctions of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments."

Following the state of the economy and riots on the streets of England, the Chancellor might want to re-read his right wing icon on this issue. We now know, thanks to research by Wilkinson, Pickett, Dorling and others, that the fabric of society is strengthened when the 'distinctions of rank' are replaced by greater equality, social cohesion and trust.

Dorling's book Injustice - why social inequality persists was part of my summer reading. I doubt if it was on the Chancellor's list. As Dorling points out, the current day Adam Smith Institute was founded with donations from rich individuals who thought we were becoming too keen on ideals of equality. In Britain inequality in wealth fell from the late 1920's through to 1981 when the richest 10% held an all time low for their group of 'only' half the nations wealth. This came about because of progressive taxation, inheritance tax and higher wages fought for by unions. Things didn't change until Freidmanite policies were introduced by British and US governments in 1980. Two-thirds of the wealth increases in the US in the 80's and 90's were in assets held by the richest 1% of the population. They owned 40% of the wealth while the poorest 40% owned 1% of the nations wealth.

Adam Smith referred to this as a moral issue, another subject the PM has had much to say on in recent days. Dorling highlights that the psychological impact of inequality drives one family in three into mental health problems. Anxiety and depression is the most common mental disorder in Britain today, with almost 9% diagnosed. A fifth of children have a mental health problem in any given year. Instead of addressing the causes we indulged in mass medication and drug company profits soared.

So if the Chancellor is concerned about tax efficiency, look a little harder at tax evasion and avoidance. For the moral and economic justification, tackle inequality. Progressive tax is a key element of that strategy.

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