50p Tax: What’s going through the Torys’ heads?

It is no secret that the Tories want to abolish the 50p tax band. There are few points more fundamental to Tory ideology than the belief that taxing the wealthy is not only bad for the economy but also morally wrong. It runs to the heart of their belief in individual freedom, economic liberalism and personal responsibility. The most surprising fact about the rumoured plans to abolish the 50p tax rate in the forthcoming budget is that it has taken the Tories the better part of two years in government to consider acting.

This is partly due to their coalition partners. The Liberal Democrats oppose the removal of the tax without the instigation of another tax on the wealthy in its place. They would prefer the Mansion Tax they proposed in their 2010 manifesto – which is also vehemently opposed by grass roots Conservatives. If the Tories were to repeal the 50p tax rate without implementing the Mansion Tax (or something similar) it could derail the coalition’s remaining legislative agenda at a time where Lib Dem support is essential to pass the government’s welfare reforms.

The second reason why the Tories have waited until now to considering removing the tax is fiscal. The government’s argument that the nation’s coffers are in such a dire state that all must make sacrifices for the economic wellbeing of the country carries little weight if it emerges that there is room in the budget to cut a substantial revenue stream. The Conservatives would be on dodgy political ground if as soon as they entered government they cut the essential services lower income earners rely on (such as EMA) and introduced a tax which falls disproportionally on the poor (the VAT rise) whilst also passing a tax break for the highest earners.

Sound economics does also lie behind the decision to keep the 50p tax rate. To reduce government borrowing as quickly as possible, tax streams would have to be kept at the current level or raised – hence the rise in VAT. Income Tax is the largest proportion of the government’s income from taxation, and high earners pay the lion’s share of this income.

So why act now? Again there is an economic case to repeal the tax. Growth has been poor since the coalition came to power, and many think tanks and economists believe that repealing the 50p tax would stimulate consumption of consumer durables (predominantly purchased by high earners) and boost the economy. It would also go some way toward attracting investment from overseas - although investment will be limited whilst growth remains sluggish. The Tories’ re-election and deficit reduction programme depend on growth rising in the next few years, and cutting taxes on high earners is seen as a short cut to achieving this.

There is also pressure to repeal the tax from within the Tory Party. Cameron has a problem with his own right flank, who feel that too many Liberal Democrat policies are on the agenda, that the government has not played hard ball sufficiently with the EU, and that Cameron is not doing enough to protect the international standing of Britain as a great nation. These MPs are also concerned about their own re-election under the Tory banner, and are crying out for some traditional Tory reforms to take back to their constituencies. Cameron’s failure to support the back-benchers’ proposed EU membership referendum has created resentment within his own party, and he needs a bone to throw to them to ensure they keep supporting the continuation of the coalition.

The Tories do have to consider the strong case for keeping the higher tax rate. Firstly, it generates essential revenue at a time when growth is slow and tax receipts are lower accordingly. Another key point to consider is that those who stand to benefit from the repeal of the rate are the very wealthy, and studies have consistently shown that the wealthy save a higher proportion of their income, whereas those with lower incomes spend the majority of their income out of necessity. If the government’s plan is to boost consumption, then conventional logic suggests the amount of money that circulates around the economy should be raised, rather than the amount left inactive in bank accounts.

Aside from this, the government is faced with a moral responsibility that any government should have, which is to help the less fortunate, the vulnerable, and those who cannot look after themselves. This government is failing in that regard as its austerity programme is cutting the services needed most by those whom society is supposed to look out for. To reduce taxes paid by those most capable of providing for themselves at this time would be a failure on a moral level.

If Osborne wishes to abolish the 50p tax band in tomorrow's budget, then he must consider the political fall-out with his Lib Dem coalition partners as well as the wider economic implications. He must also bear in mind that the most obvious logic of cutting taxes to boost consumption does not always hold true. Whatever decision is reached, it will certainly be considered a test of the Tories’ claim that all sections of society must make sacrifices in order to tackle the budget deficit. The Conservatives certainly would love to abolish the top tax bracket; whether they are willing to spend the political capital needed to do so will be a question that can only be answered by Wednesday's budget.