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

A leading centre for independent economic research has said the best evidence currently available suggests a 50p tax rate backed by Labourwill raise "little revenue" and make a "marginal contribution" to reducing the budget deficit.

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Why Labour's 50p tax plan may not pay off

by - Political Editor

Labour have mad a very simple calculation, which is that we are all a bit grumpy with big business, that we think the big business people who got very rich in the boom haven't suffered very much in the bust.

I think Labour are right in the sense that there is some grumpiness out there, there is no question in terms of opinion polling, it is a very popular measure.

It also has the advantage to them of being quite distinct, it follows on from their policy about an energy price freeze, this shows them as they would see it, as a party very much on the side of the people.

There are quite a few dangers and they are pretty obvious ones and that is people essentially say, yes the politics is terrific and perhaps cheer it all the way up to the election but then think, I am not so sure about the economics.

Francois Hollande has tried something similar in France and the French economy isn't doing so well. I think that is certainly what the Tories hope, that whatever people think in the short run, in the long run they decide the economics aren't good.

Read: Cable: 50p tax rate is a 'token gesture'

Cable: 50p tax rate is a 'token gesture'

Liberal Democrat Business Secretary Vince Cable has said Labour's proposed 50p income tax rate for those earning over £150,000 is an unnecessary, token gesture that will have negative effects.

Cable said his party were not interested in going down the 50p route, as it will fail to raise any meaningful revenue.

"We think it is unecessary, it's tokenism, it's not going to raise much, if any revenue. We do however believe there are a lot of unfairnesses in British society. It would be much fairer to have a tax on very high value property," said Cable

"The 50p rate is not a step forward...If we are serious about dealing with inequalities, we are much better dealing with unproductive wealth in the form of extreme property and the mansion tax on property over £2 million is the best way to do that," he added.

Read: Labour hits back at claims 50p tax won't help economy

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Labour hits back at claims 50p tax won't help economy

Labour has responded to the Institute for Fiscal Studies’ suggestion that the 50p rate of tax will not raise much in the way of revenue for the economy, claiming the estimates used were rushed.

Shadow Treasury minister Chris Leslie
Shadow Treasury minister Chris Leslie asks an urgent question in the House of Commons, London. Credit: PA Wire/PA Archive

The IFS, an independent economic research centre, responded to Labour's plan to reinstate the 50p tax rate earlier today, using HMRC estimates from 2012, which the institute described as being the "best evidence"

Labour's Shadow Chief Secretary to the Treasury, Chris Leslie MP has hit back at the IFS and the HMRC estimate, stating it was completed with "partial data".

“The IFS has repeated its view that there is ‘substantial uncertainty’ around HMRC’s estimates two years ago. As the IFS says, this assessment was done ‘at great speed’ and with ‘partial data’ for just the first of the three years when the 50p rate was in place," said Leslie.

“We also know that the key assumptions made in this calculation about behavioural effects were decided by Ministers, not HMRC. And the costings produced by George Osborne were based on old data," he added.

“While the Tories plot another cut in the top rate to 40p, we are clear that Labour will get the deficit down in a fairer way. Asking those with the broadest shoulders to bear a greater share of the burden is a very important part of that,” he said.

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

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

A leading centre for independent economic research has said the best evidence currently available suggests the 50p tax rate will raise "little revenue" and make a "marginal contribution" to reducing the budget deficit.

The Institute for Fiscal Studies said the best estimate, provided by HM Revenue & Customs (HMRC) in 2012, suggests that cutting the 50p rate to 45p could reduce revenues by about £3.5 billion in 2015-16 if there was no change in behaviour by affected individuals.

However, once one allows for a change in behaviour, HMRC's central estimate was a cost of just £100 million, a sum the IFS describes as "a very small amount of money".

Read: Miliband rejects letter from business bosses against 50p tax

Miliband rejects letter from business bosses against 50p tax

Ed Miliband has dismissed the letter signed by 24 UK business leaders criticising Labour's 50p tax plan, which suggests the tax hike will threaten the recovery.

The leader of the Labour party claimed the 50p tax rate did not stop businesses investing when the higher rate was previously in place for three years (from 2010, when the Labour party created the 50% tax band for anyone earning £150,000 and above).

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Ed Mili rubbishes letter from 24 business leaders: 50p was in place for 3 years, I dont believe it was stopping businesses investing

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EdMili goes on: I don't believe 50p rate acted as a dissincentive & business wants deficit to come down - revenue gotta come from somewhere

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Asked about claims from business leaders that #50ptax rate will jeopardise the recovery Ed Mili says: "Of course some people won't like it"

Read: Cameron: Labour would drive UK economy 'into a wall'

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Cameron: Labour would drive UK economy 'into a wall'

Prime Minister David Cameron has warned that a Labour government would drive the UK economy "into a wall", as business leaders voiced opposition to Ed Balls's plans to restore the 50p income tax rate.

Prime Minister David Cameron visits the headquarters of ventilation manufacturer, Vent-Axia in Crawley, East Sussex. Credit: Stefan Rousseau/PA Wire/Press Association Images

But Mr Cameron told the BBC Radio 4 Today programme: "I saw what Ed Balls said yesterday, which as far as I could see was that, if he had his time over again, he would probably spend even more.

"I think these people seem to have learnt absolutely nothing from what went wrong with our economy, that the problems were based on too much borrowing, too much spending, too much debt.

"They are really saying if you gave us the keys to the car, we would drive it exactly the same way into exactly the same wall."

Read: Business leaders criticise Ed Balls' 50p tax plan

Business boss: 50p tax rate would put recovery 'at risk'

The signatories of a letter from business leaders - in which they criticise Labour's 50p tax plan - include Sir Stuart Rose, the chairman of Ocado, Sir Ian Cheshire, the chief executive of the DIY giant Kingfisher, and Neil Clifford, the chief executive of the footwear retailer Kurt Geiger.

This will put at risk all the good work that has been done to put the economy back on track.

– Sir Stuart Rose, the chairman of Ocado

[I am] deflated to see this negative political attack on those trying to support the fragile recovery… This is a complete downer and discouragement for entrepreneurs.

– Richard Caring, the owner of Le Caprice and the Ivy restaurants

It would be suicidal.

Business people aren't against paying tax, just not at such a punitive rate.

– Charlie Mullins, the founder of Pimlico Plumbers

Read: Business leaders criticise Ed Balls' 50p tax plan

Business leaders criticise Labour's 50p tax plan

Business bosses have criticised Labour's 50p tax rate plan warning that the policy would threaten the recovery and cost jobs.

Shadow Chancellor Ed Balls. Credit: Stefan Rousseau/PA Wire/Press Association Images

In a letter published in the Telegraph, the heads of 24 of Britain’s most successful companies warn that the plan would "have the effect of discouraging business investment in the UK”.

They add that such a move would be a “backward step” that would quickly lead to job losses.

Read: Ed Balls - Labour is a 'pro-business party'

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