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Tories can ‘forget’ 50p tax rate if it’s only to help City chums, says Huhne

Climate secretary warns chancellor there would have to be a ‘cast iron’ economic case for change in tax system

Chris Huhne, the energy and climate change secretary, has warned George Obsorne to “forget” any change to the 50p tax rate if the move was designed to help the Tories’ “friends” in the city.

In his most outspoken remarks since confronting the chancellor over Tory tactics in the run up to the AV referendum, Huhne warned the Conservatives would fail to secure the necessary votes for a change unless there was a “cast iron” economic reason.

Huhne told Prospect Magazine: “If the cut in the top rate of tax is just a way of helping the Conservatives’ friends in the City to put their feet up, then forget it. They are simply not going to get the votes in the House of Commons.”

The remarks by Huhne were echoed in more diplomatic terms by Danny Alexander, the chief secretary to the treasury. In an interview with Sky Alexander said he stood by his claim that anyone who thought the government should focus on cutting income tax for the wealthy was living in “cloud cuckoo land”.

Alexander said: “I think the last thing we need at a time when everyone in the country is feeling the pinch, where we are asking people across all parts of the economy to help contribute to those efforts to deal with the economic problems, to have a focus on the tax burden for the wealthiest.

“Our priority is to reduce the tax burden for people on low and middle incomes. That is why we have an agenda of lifting the income tax threshold.

“That is what we should stick to. I don’t think we should be focusing our effort on the wealthiest. It is right to say that those with the broadest shoulders need to bear their share of the burden at this difficult time.”

The Lib Dems have intensified pressure on their Tory coalition colleagues over the 50p rate after they detected Treasury fingerprints on a letter from a group of economists to the FT calling for its abolition.

George Osborne, who makes little secret of his opposition to the rate, has commissioned research at HM Revenue and Customs to assess how much revenue the change would raise. The chancellor would like to cut the top rate of tax to at least 45p, though he acknowledges it would be difficult to act until the public sector pay freeze comes to an end in 2013.

Huhne, a trained economist, dismissed the idea that the HMRC research would be conclusive. “I would be astonished if the Treasury review was able to produce a definitive figure for the top tax rate where we start losing revenue, given the number of studies over the years that have come to different results.”

The Lib Dems are not opposed to reducing the 50p rate in all circumstances. But Huhne said there would have to be a strong economic case for action. “I have no ideological attachment to a particular tax rate,” he told Prospect. “But if we are to cut the top rate of tax from 50p there has to be a cast-iron economic justification. During tough times we have to be all in this together.”

The energy and climate change secretary indicated that the Lib Dems would demand tax changes in two areas if the 50p rate is cut: increasing tax thresholds so those on the minimum wage do not pay tax and introducing a property tax for millionaires.

Huhne said: “The top priority for tax cuts, if there is spare money, has to be lifting the hard-working low paid out of income tax altogether. In the long run, it is nuts to tax someone on the minimum wage and we should aim to lift thresholds above it.”

Osborne should bear in mind the impact on people’s behaviour in cutting the 50p rate, he added. “The chancellor has to take account of the two contrary effects on work effort from a tax cut,” said Huhne. “First, a cut in marginal tax rates has an incentive effect because people are able to keep more of what they earn when they work harder or longer. But it also has a disincentive effect because they get extra income without any extra work and can therefore earn what they want with less work.”

The best way to guarantee that a cut in the 50p rate would boost work would be by imposing the mansion tax, he said. © 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