Friday, 2 March 2012

Boosting Business and Encouraging Entrepreneurs

An alliance of rich people has written to the Telegraph urging the Chancellor to cut the top income-tax rate so as to "boost business and encourage entrepreneurs".    I'm puzzled by this: there's no need for entrepreneurs to pay income tax on money they invest in new businesses.  Do they mean that higher income taxes cause them to take more money out of their businesses so as to maintain their net income?

Meanwhile, other opponents of the 50p top rate warn us that it may not raise any extra money anyway, because it will put top-rate payers off earning the stuff.  They might be right, but if so, it tells us that the rich guys are not that interested in maintaining their net incomes, otherwise an increase in the top rate would make them work even harder.

So one of those arguments could be right, but not both.

A more cautious analysis would suggest that much of the reduction in top-rate take is likely to be temporary: it's much easier for high earners to move their income forward or back by one year than by two years or more.  That would suggest that in all fairness we should persist with the 50p rate for long enough that everyone who ought to pay it has to pay it.

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