Yorkshire Post: Why taxing the rich could make us poorer

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Hope springs eternal in the breasts of politicians. None more so than Alistair Darling's in his Budget speech.

He conceded that Britain's economy was in a bad way. It would shrink by 3.5 per cent this year, rather more than the one per cent dip he forecast only in November. But hey, every country is in a bad way right now, and by 2011-12, the UK will be growing again at a record, rip-roaring rate of 3.5 per cent. Crisis? What crisis?

Unfortunately, British Budgets tend to unravel pretty quickly. Ever since the £5bn "stealth tax" on pension funds that Gordon Brown somehow forgot to highlight in his 1997 budget speech, and which helped to kill half of Britain's workplace pension plans, people listen to the Chancellor with more than the usual scepticism.

We only had to wait a couple of days before the Office for National Statistics punched a hole in the Chancellor's optimism. It reckoned that the UK economy had just suffered the biggest six-month fall since records began, in 1948, and much more than the Government
had assumed.

The International Monetary Fund piled on even more gloom by predicting that this year's drop in British growth would actually be 4.1 per cent, and that the economy would also shrink next year.

It is all bad news for a government trying desperately to borrow its way out of the crisis while soaking the "rich" by raising the top tax rate to a confiscatory 51.5 per cent.

There comes a time when short-term borrowing turns into a long-term problem. Already, with the increase in the top income-tax rate, the Government is beginning to look desperate.

This is all eerily reminiscent of Denis Healey, the Labour Chancellor of the late 1970s, who promised to "tax the rich until the pips squeak" with rates as high as 83 per cent on income from work and 98 per cent on investment income. In the end, he had to ask the IMF for an embarrassing bail-out.

The trouble with taxes is that raising them above a certain level becomes counter-productive. People will find it economical to hire expensive accountants to avoid paying the full amount. If everything else fails, they may take themselves and their money abroad to gentler tax jurisdictions, as the actor, Sir Michael Caine, just threatened to do.

The Treasury claims that the new 50 per cent rate will bring in £1.3bn next year, but the Institute for Fiscal Studies says it might not raise anything at all, since perhaps 70 per cent of top earners will either evade or avoid it. The Centre for Economic and Business Research thinks that as many as 25,000 top earners may leave the country, costing the Government – and the London financial market – hundreds of millions of pounds in lost tax revenues and investments.

Taking 51.5 per cent of people's earnings sends all the wrong signals. It suggests – absurdly – that the Government is better at spending our money than we are. Higher taxes will simply induce people to spend less and leave entrepreneurs with less for investment, neither of which will help Britain recover.

When Margaret Thatcher slashed the top rate to 40 per cent, high income earners actually paid more, and contributed a far bigger proportion of total revenues, than they had before. Even former Labour Prime Minister Tony Blair denounced the 50 per cent tax rate as "wrong, seriously wrong".

Interestingly, while higher income earners are supposed to bleed for the nation and businesses have been hit by the full force of the recession, government workers and their generous index-linked pensions have been left largely unscathed.

And what of the Conservatives? They are the clear favourites to win next year's election. It would then fall to David Cameron to sort out Britain's debt. Will he have the steel to bring the public finances back into order?

He has spent much of the last few years trying to make the Tories look kinder, gentler – majoring on social justice rather than tax cuts. He's even said that, although the new 50 per cent rate was a "pathetic piece of class-war posturing" rather than sound economics, removing it would "not be a high priority" for any future Conservative government.

Although Mr Cameron may have tried to rebrand the Conservatives, he still shares one of Mrs Thatcher's core principles – that a nation, like a family business, has to balance its books.

He must know that if he becomes Prime Minister and fails to deliver a leaner, sounder, less indebted government, his party will be finished. Even worse, so will be Britain.

Dr Butler is director of the Adam Smith Institute and author of The Rotten State of Britain: Who Is Causing the Crisis and How to Solve It, published by Gibson Square Books, price £12.99.

Published in the Yorkshire Post here