Economists disagree shock

This should come as no great surprise, indeed it could apply to any group of experts. However, I was interested to see that my colleague Mark Harrison (with whom I taught Making of Economic Policy last academic year) was one of the signatories of the letter from 20 economists in the Financial Times yesterday arguing that the 50 per cent tax rate was damaging to the economy. Today there is a reply from Andrew Oswald also in the Economics department at Warwick, although currently based in Bonn and best known as a happiness guru.

Oswald points out that the signatories produce no evidence to support their case and states that what evidence there is points in the opposite direction. The evidence that Oswald cites seems a bit limited as it is based on a case study of a tax hike in New Jersey.

In another letter, Alan Manning of LSE points out that a study of footballers, plausibly the most mobile of professions, did find that tax rates influenced location decisions, but the effect was not large and the research concluded that the revenue-maximising tax rate was well in excess of 50 per cent.

Of course one could argue that the 50 per cent rate sends out a signal about whether Britain is 'open for business'. Its main effect may not be inducing relocation, but dissuading location in the first place.

In any case the tax has not been in place long enough for its effects to be properly studied, although the Treasury is trying to make some calculations. One of the considerations has to be whether it encourages the use of tax avoidance devices.

Of course in many respects what the tax is about is political symbolism. It is a seen as a gesture towards 'fairness', although whether it does promote fairness is another matter. But withdrawing it would be politically costly when median incomes are being squeezed.

If the goal is revenue maximisation, then it is arguable that property taxes are more efficient and less distortive. A 'mansion tax', a 1 per cent levy on the amount by which a property's value exceeds £2m, would generate enough revenue to replace the mansion tax. But it might be politically difficult for many Conservatives.

Proceed with caution

Apparently some consideration is being given to replacing the 50 per cent tax rate by increasing the 40 per cent rate to 45 per cent. The 50 per cent rate (63 per cent if one takes account of national insurance) is, of course, loaded with political symbolism in terms of 'punishing the rich' but is totally ineffective in terms of generating any additional net revunue. It just complicates further an already complicated tax system.

However, in political terms one has to be very careful about increasing the 40 per cent rate. It brings within its net a considerable number of people who are potentially Conservative voters. One could, of course, increase the threshhold (which has fallen behind increasing salaries) to reduce the impact but this could minimise the revenue raising effect.