Tough choices become tough luck for those with less to give

Stewart WoodLord Stewart Wood of Anfield is a Shadow Minister without Portfolio in the Shadow Cabinet, strategic adviser to Ed Miliband and a Labour Peer

Yesterday we saw a Conservative Chancellor give a Budget at a time of stagnant growth, rising levels of unemployment not seen since the mid-1990s, youth unemployment of over 1 million, and real living standards confirmed yesterday as dropping for the second year in a row - the first time that has happened for 36 years. 

Given all this you’d think it reasonable for families, small business and pensioners to expect the Chancellor to use his Budget to respond to the squeeze and insecurities they face.

What did we get?  A Budget that had no strategy to kickstart growth and boost employment. And a Budget that was focused on redistribution in favour of the very wealthiest in our society, at the expense of pensioners and ordinary families.

George Osborne’s spinners briefed that ending the 50p rate of income tax (paid by the 1% who earn above £150,000 a year) would be the centrepiece of his Budget.  It certainly was.  It is an income tax cut that will give the wealthiest 14,000 people in Britain a windfall of, on average £42,500 each. 

What is the possible justification for prioritising, of all things, the end of the 50p rate?  Its advocates say: “First, it doesn’t bring any money in because it is avoidable.  Second, it is deterring people from coming to this country who would bring in wealth”.  But you can’t have it both ways.  Either it is eminently avoidable, or it is a serious deterrent.  If it is a deterrent that is avoidable, it doesn’t do much deterring.  And if it is avoided, the right response is not to change the rate but to clamp down on the avoidance.

But with this government, there are different kinds of tax avoidance.  When it comes to stamp duty, Osborne said he would come down like a ton of bricks on morally repugnant behaviour and sharp practices.  At the same time, he was recommending the scrapping of the 50p tax on the wealthiest because we have to resign ourselves to the inevitability of income tax avoidance.

Does the 50p rate deter the rich from working?  There is no evidence that it does.  If the wealthiest’s work-rate is on the wane, then the fact that their incomes continue to soar ahead of average wages suggests there is something deeply dysfunctional in the labour market for top earners.

But the scrapping of 50p doesn’t add up on tax revenue grounds either.  The argument that it brings in no extra income is based on data from one year – a year of high avoidance to take advantage of the transition to 50p!  But now, by scrapping it as of April 2013, the Chancellor has thrown down the gauntlet to the accounting profession to meet another challenge: they have months to work out how to defer income of their very wealthy clients for another year so that they benefit from the 45p rate in 13 months time rather than in this tax year.  The race is on. 

The Budget also assumes that all who avoided the tax at 50p will come flooding back into the tax system now it is set at 45p.  This is an assumption of truly heroic proportions.  The government is resigned to income tax avoidance, but thinks a 5p reduction will be sufficient to eliminate it completely.  Good luck with that one. 

When it comes to stamp duty, the Chancellor’s claim of equivalence between a tax on income on the very wealthy and a tax on the very occasional transactions of property worth over £2m, is highly debatable.  About 1% of those earning over £150k are likely to move to houses worth £2m or more in the next year.  So 99% of this group will simply benefit from a huge tax cut.

The truth is that the cut in 50p tax is an ideological choice that has had its advocates scrambling around for rationales.  The government talks constantly about tough choices, and there are certainly tough choices that they have to make.  But yesterday saw them make a big choice that was not tough.  It was a choice to favour, in straitened times, those who already have the most.  It was the moment when their credibility as a government that asked every section of society to bear their fair share of the pain was fatally undermined.

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