Monday, 12 September 2011

More talk on the 50p tax rate.

I wrote about a month ago regarding the large amount of noise by people wishing to remove the 50p tax band, the talk of which hasn't appeared to die down.  I wanted to bring this up again after reading an excellent piece by Simon Jenkins on the Guardian's website last week.  In principle I am against high levels of income tax, however I agree that it is completely nonsensical to be reducing the highest rate at the moment (in fact I feel that 50% feels fair).   A few points I want to pick out of this article:

"The truth of the matter is that Britain's rich have got very rich indeed, and continue to do so through the recession. Over the past decade, the stock market valuation of the FTSE 100 has declined 25%, while relevant executives' pay has risen 85% in real terms and bonuses 350%."

To me this is why most people have a problem with the super rich directors of the FTSE 100 and the multi millionaire bankers - their high rewards over the past few years have not been obtained through exceptional performance.  The value of these companies to their owners has decreased, yet those managing them have taken massively increasing rewards.  This happens because directors set their own remuneration.  They don't do it directly, good corporate governance requires the presence of a "Remuneration Committee" that is made up of Non-Executive Directors (NEDs) who are supposed to have the shareholders interests at heart (and get paid a flat fee).  These NEDs set the remuneration in order to attract, motivate and retain the best people for the job and do this using the market rates - however they are also highly likely to be Executive Directors of other companies and as such have a vested interest in driving up the market rates.  This is clearly unsustainable, the Institutional Investors in companies need to have a greater handle on the amounts that the directors and high ranking members of staff are paid.  The problem with bonuses are that they should be paid for improved performance above the expected (a small profit share) however the increase in bonuses has been completely out of kilter with performance.

No evidence was given for abstract assertions about what incentivises new businesses and helps companies expand. Even back in the 1980s a Treasury study could find no disincentive in income tax. As many worked harder when taxes rose so as to maintain net income as worked less hard out of frustration. All evidence is anecdotal, usually of "a friend thinking of moving abroad".

The evidence for removing the policy is usually anecdotal (and rarely testimonial), I am sure people get frustrated by it but soon adapt and then try and work harder to match their previous income.  If the net percentage goes down the obvious thing to do is to try and increase the gross as you can affect that!

The politics of all this is clear. The Tories want to toss some token of comfort to their core voters, though there cannot be many earning over £150,000. Yet when the rich are getting richer and average families have just been hit by £450 a year in higher VAT, it seems politically mad to cut an estimated £2.7bn from taxes on the richest 1%.

There may not be many of them, however I'd wager that quite a large proportion aspire to this, even if it is an unrealistic aspiration.  

If we are "all in this together" then the richest should recognise this, recognise that they have found themselves in a privileged position (granted usually through hard work) and that other people haven't had the same opportunities and therefore there is a need for those with the broadest shoulders to carry more of the burden.  

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