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Shadow Chancellor Ed Balls has announced that a Labour government will reinstate the 50% tax rate on incomes over £150,000. In a speech to the Fabian Society conference, Ed Balls also called for a 10% starting rate of tax. However, what income bands this lower rate would apply to was not stated. This proposal concerns political symbolism, rather than raising tax revenues, as suggested by the jubilations of Labour activists.
(Video: The Telegraph)
The symbolic importance of the 50p rate was recognised by Universities Minister David Willetts. Chancellor George Osborne said: “It is very important that people see that when times are tough, we are, as they say, all in its together”. Prime Minister David Cameron has sought a small amount of tax relief for married couples, which the Institute for Fiscal Studies has decried as “symbolic”. In France, President François Hollande introduced a 75% levy on salaries of over €1m. President Hollande called the new tax “symbolic”, and designed to project political messages about fairness. A British financial transactions tax, often labelled the Robin Hood Tax, is being demanded to demonstrate the contrition of financial services.
The British 50% income tax rate certainly collected much less than anticipated. The 2012 HMRC analysis concluded “the underlying yield from the additional rate is much lower than originally forecast (yielding around £1bn or less), and that it is quite possible that it could be negative”. Furthermore, “the negative impact on GDP may increase over time, and therefore the direct yield (and revenues from other tax bases) might fall over time toward or beyond zero.” According to HMRC projections, the tax liability of additional rate taxpayers was £34.5bn in 2010-11, £41.3bn in 2011-12 and £41.6bn in 2012-13. These three years were under the 50% tax rate. Under the first year of the new additional rate of 45%, that liability rose to £49.3bn. This lower liability in 2010-11 reflects forestalling and other behavioural effects.
Instead of seeking to maximise revenues whilst minimising deadweight losses in economic activity, some taxes are levied to highlight political priorities, to garner popularity, and to extract penance over monies. John Baptiste Colbert famously said: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” The art of symbolic taxation is to make one goose hiss very loudly to assure the other geese you’re on their side.