By Claire West

In a new report the Adam Smith Institute have calculated the negative effects of the top UK tax rate and called on the coalition government to scrap the 50p tax rate in this year’s budget.

If the government keeps the 50p rate it will have highly negative effects, leading to lost revenue of £350billion or more, as well as flat economic growth.1

The report points out that the UK has become one of the most highly taxed countries in the world. Evidence from overseas shows that high top tax rates fail to produce public revenues and injure economies. The introduction of the 50p tax rate, along with the 40% higher tax rate band and high CGT levels, has stifled our competitiveness and economic growth.

Tax rates are above revenue-maximising levels and if they remain high then this will affect the behaviour of wealth creators in the UK. There has already been some emigration from the UK finance industry and the Institute’s research suggests the high tax rates will lead other wealth creators to emigrate or seek other routes to minimise their tax liability.

In the report, The Revenue and Growth Effects of Britain’s High Personal Taxes, authors Peter Young and Miles Saltiel recommend that the 50p tax rate should be scrapped to make the UK a more internationally attractive place for business. They also suggest the Chancellor should eliminate the revenue-losing £30,000 non-dom charge immediately; reduce the higher rate of income tax from 40% to 35% and announce an intention of further reductions over time; reinstate the personal allowance that is currently phased out between £100,000 and £115,000; and reduce the level of Capital Gains Tax.

Dr Eamonn Butler, director of the Adam Smith Institute said:

“It's not that high fliers can't afford a 50p tax rate. It's just that they quite understandably resent governments grabbing half of everything they earn. That is why they are falling into the open arms of our competitor countries, who make them feel far more welcome.”

Tom Clougherty, executive director of the Adam Smith Institute, added:

“The government says the forthcoming budget will be all about growth, but no amount of tinkering around the edges will make up for the fact that we have an extremely uncompetitive tax regime, which is increasingly making hard-working entrepreneurs wonder why they bother. Yes, we need to balance the budget — but high taxes are not the way to do it. What we need to do is couple a smaller, more efficient public sector with a dynamic, enterprise economy. Scrapping the uneconomic, politically-motivated 50p tax rate would great start.”