The politics of the top income tax rate

Regardless of what the national fiscal situation looks like at any given point in time, few topics divide the commentariat right from the commentariat left as keenly as whether or not the top rate of income tax should be cut. The right will have you believe that cutting the top rate of income tax encourages the rich to spend more and the entrepreneurial to expand their businesses; that a heavy top tax rate discourages people from striving to earn more and encourages them to find ways to cheat the tax system. The left will have you believe that cutting the top income tax rate, explicitly (as it is) in aid of the affluent, cannot be morally justified when there are so many more worthy targets for government expenditure out there. Why put a few more dollars into the bulging pockets of society’s most fortunate, when you could put a few more dollars into schools, hospitals, or to help the needy or vulnerable? Ethically it just doesn’t add up.

As someone firmly on the “left” side of the argument, I do wonder whether there would be any circumstances under whether I would feel that a cut in the top rate of income tax could be justified. Society, I think, would have to be motoring along swimmingly, with a high median income and a high quality of public service provision for people from all walks of life. There would need to be a clear sense that people on high incomes were really being stifled by the tax system, or that the tax system was configured in such a way that the top tax rate was proving ineffective in delivering revenue.

Two of the giants of Western Europe have seen some of these philosophical issues rise to the forefront of public debate in recent weeks. In France, the Socialist presidential candidate François Hollande has proposed a bold tax rate of 75% on personal income earned over €1,000,000 per year. Contrastingly, in the UK, a furore has arisen in the lead-up to the Budget (to be delivered on Wednesday at 12:30PM UK time) after it emerged that the Conservative/Lib Dem Coalition are planning to cut the top income tax rate from 50% to 45%. Andrew Rawnsley at The Guardian has a ruminative piece summing up the machinations, and asks the question most LP readers are probably wondering:

Reducing the top rate will please a lot of Tories and it won’t have escaped Mr Osborne’s notice that these are the people who will ultimately select Mr Cameron’s successor. It will obviously go down well among the minority who earn enough to pay the top rate. No doubt it will be justified on the grounds that a 50p rate sends a negative signal to entrepreneurs and deters talented people from working in the UK. But the chancellor will struggle to explain why he has made a priority of cutting the top rate to the far greater number of less affluent voters who are suffering the worst squeeze on their living standards in decades.

In short, cutting the top tax rate (as Rawnsley quotes “senior Labour figures” as describing it) really does sound politically mad. It will literally benefit just the top 1% of tax-payers, leaving a sizable proportion of the remaining 99% feeling appalled at the government. It provides the struggling Labour Opposition with a stonking great club with which it can beat the Conservatives and condemn them as being out of touch.

This is an act that reeks of the Tories’ self-perceived need to touch up their own supporters, with scant regard for either the state of the economy or the vast majority of the British population. The next election is still a few years away – so there is a palpable sense of “now or never” for the blue-bloods, with a few years grace yet to patch up their image before the public gets to pass judgement on them again. What is ironic is that Hollande in France is taking a mirror-image approach; 75% is a hefty headline-grabbing number seemingly designed more to mobilise and appeal to his party’s base rather than to solve France’s economic woes or to aid the struggling.

When did the top income tax rate become little more than an intellectual chew-toy for the political classes?

Crossposted at Larvatus Prodeo.