Time for a 40% top rate


Lord Lawson has called for George Osborne to lower the top rate of income tax to 40% in his July budget.  It is a timely call that echoes former times.  When Nigel Lawson, as he then was, was preparing his 1988 budget, the ASI published research showing that if he lowered the top rate from 60% to 40%, the Treasury would soon gain revenue, even though the government share would be smaller in relative terms, and the burden on business would be lighter.  

Chancellor Lawson did just that, lowering the top rate to 40% and the starting rate from 29% down to 25%.  This was his trademark tax simplification.  From a myriad of rates and thresholds he now had reduced income tax to only two rates.

Not only did Treasury revenue increase as predicted, but the richest 10% ended up paying a higher share of the total.  From just over a third, their share rose to just under half of the total.  Again, this was what research had forecast would happen.  By contrast, when Labour reneged on its election promise and raised to top rate to 50%, official figures show that it raised nothing like the £2.9bn glibly forecast by Alistair Darling.  And when the coalition lowered it back to 45%, the tax loss was estimated at only £100m.

To cover the political charge of lowering tax for top-rate payers while cutting the welfare bill, Mr Osborne might try a new tactic.  He should lower the top rate from 45% to 40% on a two-year trial basis.  If after that time two results had not been achieved, he should promise to revisit it.

The two results required would be:

1. That the revenue raised from income tax was now higher than it was from a top rate of 45%, or about to become so, and

2.  That the proportion of income tax paid by the top 1%, the top 5% and the top 10% of earners was now higher, or about to become so, than it had been under a top rate of 45%.

Lord Lawson is completely right.  Lowering the top rate to 40% would make Britain a more attractive place to do business.  It would attract talent and investment to boost our economy.  It would achieve growth at no cost to the Exchequer, and it would create jobs.  More to the point, it would send a signal to the world that the UK was once again achievement oriented.  Mr Osborne should be brave.