The 50p tax debate: is it good for the UK economy?

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The 50p tax rate debate
The 50p tax rate debate Photo: Gareth Fuller/PA Archive

After letting his Chancellor make the announcement and justify the decision at the weekend, Ed Miliband answered questions for the first time this afternoon about his plans to re-introduce the 50p rate of income tax.

It came on the day two dozen business leaders said the decision would cost jobs and put the economic recovery at risk. The Labour leader rubbished those claims - insisting to me that the 50p rate, for the three years of it's life, did not stop businesses investing in the UK and nor did it act as a disincentive.

He insisted it was the "fair way" to get the deficit down and push the burden onto those "with the broadest shoulders." Labour says the new tax would bring in £3.5 billion each year for the Exchequer.

Earlier, the Prime Minister said Labour had taken a decision that was "politically convenient" but one which would be "very very bad for the economy." So far - so confusing.

Then this afternoon, the respected number crunchers from the Institute for Fiscal Studies released their analysis and it wasn't very helpful for Labour. Cuttingly, the IFS said raising the top rate of tax would "raise little revenue and make, at best, a marginal contribution to reducing the budget deficit…"

Labour party leader Ed Miliband
Labour party leader Ed Miliband speaks during Prime Minister's Questions in the House of Commons, London. Credit: PA/PA Wire

And it's assessment for how much it raises for the Treasury? Accounting for the changes in behaviour by those who pay the top rate: £100 million.

£100 million is not a large sum for a government which spends more than £750 BILLION each year and where the current deficit is running at £111 BILLION.

So if it raises little money and potentially puts off business investment, you'd be right to ask: "why do it at all?" The answer to that is a political one.

Promising a tax rise for those on a salary 99% of us do not earn is not going to cost Labour very many votes. In fact, arguing that the rich should pay more to bail out the country is one which will resonate in many, many constituencies.

The harder argument to make is that cutting tax for the very rich is a good plan economically, and that's the challenge the government now faces.

Abolishing the 50p rate costs ministers political pain in the months after it was cut and by refusing to join Labour in re-introducing the 50p rate - Labour hopes this decision will cause more pain for David Cameron and George Osborne.

But at least now - on the issue of income tax - there is a very clear dividing line between Labour and the Conservatives.

Read: IFS: 50p tax will raise 'little revenue' for UK economy