The fifty percent fiction

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Despite George Osborne's assertion that the next Conservative government will retain Labour's 50 percent top tax rate on incomes over £150,000, it is highly probable that this will not happen. It is not that Mr Osborne was misleading the Tory Conference, merely that events will change and force with them a change in policy.

In the first instance Mr Osborne has underestimated the opposition to this tax in both the City and within his own party. City people are united in a hostility to it that borders on contempt. They already have no respect for the government that introduced it, and will have none for a government that sustains it. The pressure of their opinion will cause the Shadow Chancellor to re-visit his plans. Nor have I met a single Conservative MP or candidate who supports the tax; and as their opinions are expressed privately to Mr Osborne, this, too, will influence his thinking.

The chief thing to change opinion will be the increasing chorus of expert opinion that this tax, far from raising additional revenue, will cost the nation dear and leave a big hole in the finances unless it is abandoned. Already the Adam Smith Institute and the Institute for Fiscal Studies, both using a dynamic interactive model of the economy, have concluded that a 50 percent rate will raise less than the current 40 percent rate as incentives decline and people choose to seek more tax-friendly regimes in which to base their activities. By the time this tax change takes effect in April, the scale of the exodus will be becoming clear, as will the loss to the Revenue caused by the departures.

Mr Osborne's point that the tax should stay in place throughout a public sector pay freeze is not a valid one. What he should have stressed is the importance of getting the rich to pay their fair share. In fact the proportion of tax paid by the rich declines when rates go up, and increases when they are lowered. Faced with united anger from the City, zero support among his backbenchers, and the evident fact of a loss in revenue, the 50 percent tax will be allowed a decent but hasty burial. On its grave they might inscribe "2010 – 2010. Killed by reality."

Check out Dr Madsen Pirie's new book, "101 Great Philosophers."

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