Depending on your politics and point of view a 50% tax rate for those earning more than £150,000 per year may seem fair.
However, there is absolutely no economic sense in taxing the highest earners at this level as it leads to a fall rather than an increase in the tax take for the exchequer.
How can this be so? Well, at 45p in the pound a successful business owner or entrepreneur may wince a little, but psychologically they will live with it.
Once you tell someone you want half of their income, it is of little surprise that they start to aggressively investigate the many loopholes that exist to stop HMRC getting their mitts on their hard earned cash.
The other problem with the 50p rate though is that is does cap aspiration and ambition; it signals a culture of envy rather than enterprise; and most worryingly it prevents business owners from investing in growing their companies. What is the point of adding £500K to your bottom line if the return you get is likely to be less than 10% of that? It is a risk that is not worth taking.
That is why I think that Ed Balls announcement that a Labour government would re-introduce the 50p rate is wrong, and more ‘gesture politics’ than economically savvy.
Labour believes that the majority of us who can only dream of a salary of 150K support the measure and will vote accordingly.
I think it will enable the Tories to paint Labour as anti ambition, anti business and as the party of taxation. It was a road tried and tested by Neil Kinnock and John Smith in 1992, much to John Major’s delight.
It didn’t work for Labour then, and although scandals with banks and our big financial institutions means we are in a different place today, I doubt if it will work in eighteen months time when the country goes to the polls again.
Nonetheless, the battle lines have been drawn and it will be interesting to see if Cameron and Osborne take a gamble of their own by announcing a further cut in top rate tax to 40p; and how shadow business secretary Chuka Umunna convinces business leaders that Labour support his ‘British Dream’.