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George Osborne urged to scrap 50p tax rate

Group of high-profile business experts says top rate of tax is doing ‘lasting damage to UK economy’ but Osborne says he has no intention of rethinking tax and spending plans

The chancellor, George Osborne, is under pressure after a group of economists called for Britain’s 50p top rate of income tax to be scrapped “at the earliest opportunity” to boost growth, amid fresh concerns that the UK is slipping towards a double-dip recession.

Osborne made clear on Tuesday night that the coalition had no intention of rethinking its tax and spending plans, but admitted the long-term damage to the economy caused by the credit crunch was forcing him to revise downwards estimates for growth that were already weak.

In a speech to the City, the chancellor insisted the government would not waver from its tough fiscal approach and said early action to tackle the deficit had put Britain “ahead of the curve” and in control of its economic future.

But a 20-strong group of high-profile business experts signed a letter in Wednesday’s Financial Times expressing concern that Britain’s top rate of tax is doing “lasting damage to the UK economy”.

The call was rejected by Alistair Darling, the former chancellor who unveiled the 50p rate in his 2009 budget, who said that removing it before the end of the banking crisis would be “grossly unfair”.

The letter by economists, who include Cambridge University academic Bob Rowthorn and former members of the Bank of England’s monetary policy committee DeAnne Julius and Sushil Wadhwani, claims the top rate introduced by the last Labour government, which applies to high earners on an income over £150,000, “punishes” entrepreneurship.

They called for a return to an “internationally competitive tax regime” to stimulate the faltering economy.

“We are concerned that Britain’s 50p income tax rate is doing lasting damage to the UK economy,” they wrote. “It gives the UK one of the highest personal tax regimes in the industrialised world, making it less competitive internationally and making us less attractive as a destination for both foreign investment and talented workers.

“It punishes wealth creation by imposing on entrepreneurs and business people a marginal tax rate in excess of 50% once national insurance contributions are added in. This is particularly damaging when the UK needs to create new businesses in new industries.

The economists, who said the rate applies to just 1% of people who pay 24% of all income taxes, added in the letter: “We call on the government to drop the 50p tax at the earliest opportunity as part of a package of measures to stimulate growth.

“Only by returning to an internationally competitive tax regime will Britain enjoy long-term sustainable economic growth.”

In an interview with BBC Radio 5 Live to promote his new book, Darling hit back by saying that the top rate of tax should stay in place until the country “gets out of the crisis”.

Now a backbench MP, Darling said he did not rule out removing the tax in the long run but recommended raising personal allowances for basic rate tax payers, who are the ones “really squeezed at the moment”, instead of cutting the 50p rate.

“This has got to stay in place until we get out of the crisis. It would be grossly unfair to remove it,” said the former chancellor. “In the long run you have got to keep your tax rates internationally competitive, which means something like the tour rates we used to have. To remove it today would be grossly unfair. If they do not pay their taxes then it is poorer people who are going to pay.”

But one of the authors of the FT letter said many hedge funds have already moved to Switzerland and urged the government to act “as soon as possible”.

Julius told the BBC Radio 4′s Today programme: “By raising marginal rates on a small number of highly mobile people you end up not collecting the tax that you’d hoped to.

“Politically speaking it is going to be difficult to abolish whenever it is done. What we are trying to do is say this is not just a matter of politics, the country really does need to increase its growth strategy and this is a place where we are just shooting ourselves in the foot.”

Osborne, already under pressure from the right of his party and from business chiefs to abolish the top tax rate, has previously signalled that he believes the rate should be scrapped if it is not raising significant revenue, but it is not expected to be abolished before 2013 at the earliest, when the public pay freeze is due to be lifted.

The chancellor used his speech at Lloyds of London to assert his intention to stand by his tough fiscal plan for the country. “It is the rock of stability upon which any sustainable recovery depends and we will hold to it,” he said.

Osborne hinted that he expected the Bank of England to take action against growing recessionary pressures with a second round of the electronic money creation process, known as quantitative easing.

The chancellor made his comments as finance ministers and central bank governors from the G7 group of countries are expected to call for fresh measures to stimulate growth when they meet in Marseilles this weekend following warnings from the International Monetary Fund and the World Bank of the dangers of seeking deep cuts in the budget deficits. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds