Thursday, 1 December 2011

paying 50p ...

What are the main arguments in favour of keeping the 50p tax rate?
-higher revenues for the government (“50p tax rate will raise an additional £12.6bn over the next five years even if people choose to leave the country to avoid it”)
-tax revenues could be used to develop the economy, fight the recession etc.
-moral and fair

What are the main arguments in favour of scrapping the 50p tax rate?
-high-income people could flee the country
-disincentive for foreign investors and workers
-disincentive for entrepreneurship
-lower competiveness

What does the Laffer curve show? Is it relevant in the case of the 50p top rate of tax? What does it suggest about the ability of the tax to generate income?

The Laffer curve shows the relationship between the tax rate and the tax revenue. It can be seen that, as taxes increase from low levels, tax revenue collected by the government also increase, but after a certain point (T*) people would be discouraged to work and the tax revenue would fall. Eventually, if tax rates reached 100% , then all people would stop working because they would have to give everything they earned to the government.

 It is relevant in the case of 50p top tax rate because it shows that after a certain level, a tax rate could harm the economy. The problem is that it is very difficult to estimate the (T*) rate and many factors affect the predictions.

A possible non-symmetric Laffer Curve with a maximum revenue point at around a 70% tax rate

How does the top rate of tax affect the international competitiveness of the UK economy?
The 50p tax decreases the international competiveness of the UK because it creates disincentives for investors and enterpreneurs to come to the UK.

Why is there a trade-off between raising tax revenue and boosting economic growth through the use of the 50p tax rate?

There is a possibility that high-income people would flee the country in order to avoid high taxes or work less. Moreover, they could spend less (lower demand), because their disposable incomes would be lower. It could also discourage entrpreneurs to start new businesses or invest in others.

Why is there concern about the highest rate of tax actually causing tax revenue to fall?
Because many people would have the incentive to flee the country or work less, to pay the lower tax.

What are the equity arguments concerning the scrapping of the 50p tax and raising the tax threshold?
-all people should pay the same percentage of their incomes
-high income people pay much more anyway

Is there an equity argument in favour of the 50p tax rate?
-high-income people should pay higher taxes to reduce income disportions
-if one tax rate is to be decreased the other shoul be reduced also

That's what I think, 


  1. Really interesting and good work. There are quite a lot of criticisms of the Laffer Curve out there ( for example) - what do you make of them?

    Do you think there really is an incentive to earn less than £150,000 because of the 50p tax rate? I know nobody likes paying a lot of tax, but doesn't everybody like earning more? And nobody's worse off for owning more...

    Of course one problem with the 50p rate is that so very few people pay it (because it comes in at such a high income level). Would bringing it (or 45p) in at a lower levels (80 or 100 thousand for instance) be better or worse?

  2. (That should have read "nobody's worse off for EARNING more!)