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Published on March 21st, 2012 | by Justin Cash
Image © [caption id="" align="alignnone" width="565" caption="© HM Treasury"][/caption] By this afternoon, the contents of the Chancellor’s red briefcase will be very much public knowledge.  He has already hinted that the main focus of the 2012 Budget will be on lower to middle income earners, and that the budget will not simply be a Conservative manifesto but will represent both sides of the coalition. With this in mind, Mr. Osborne has a significant political motive to continue increasing the personal allowance before which one has to start paying income tax in this year’s Budget.  Not only is this in line with Liberal Democrat objectives, but raising the current allowance to £10,000, say, would be a symbolic gesture that would appease a country disillusioned with persistent income inequality of late. Maybe such a move would be enough to subdue the inevitable public outcry should the Chancellor elect to abandon the 50p top income tax rate next year.  However, forsaking political posturing, the Budget should lay out a framework for doing so.  True, there is as yet no evidence to suggest that the 50p rate introduced last year has inhibited UK growth, but past experience can be an excellent indicator of the success (or lack thereof) of elevated top end tax rates. In 1979, the highest UK earners were subject to an income tax rate of 83 percent.  Under this system, the top 1 percent contributed 11 percent of all tax revenues to the treasury.  Today, this same 1 percent pays more like 27 percent of total tax revenues.  What is more, the proportion of GDP taken in taxes and social security payments is greater now than it was in 1979.  In this respect, we are hardly under-taxed in the here and now. In any case, it is probably too late for a tycoon tax to make its way into the Budget, having only been talked of by Nick Clegg very recently.  What could be done to make the rich pay their way, however, is to cut pension relief for the top few percent of earners.  This is hardly a trivial matter; pension relief effectively provides a 7 billion pound tax break for the richest in society.  Osborne has said that he will announce measures to close loopholes in stamp duty for high earners, which though certainly a step in the right direction, may not have as great a scope for revenue generation as Osborne believes.

Since this is supposed to be a coalition Budget, Osborne may also want to concede the introduction of a mansion tax should he decide to abolish the 50p tax rate.  Again, this will save face with the public to some degree.  But what Osborne really needs to boost his popularity is economic growth.  Fortunately, some of the infrastructure spending announced in the last Budget will come into effect next financial year.  If we are to believe the evidence that this spending can be three times more effective at stimulating growth than tax cuts, it may offer a ray of light in what will inevitably be a tough time for the Chancellor.

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What Should Be In The Budget?

© HM Treasury

By this afternoon, the contents of the Chancellor’s red briefcase will be very much public knowledge.  He has already hinted that the main focus of the 2012 Budget will be on lower to middle income earners, and that the budget will not simply be a Conservative manifesto but will represent both sides of the coalition.

With this in mind, Mr. Osborne has a significant political motive to continue increasing the personal allowance before which one has to start paying income tax in this year’s Budget.  Not only is this in line with Liberal Democrat objectives, but raising the current allowance to £10,000, say, would be a symbolic gesture that would appease a country disillusioned with persistent income inequality of late.

Maybe such a move would be enough to subdue the inevitable public outcry should the Chancellor elect to abandon the 50p top income tax rate next year.  However, forsaking political posturing, the Budget should lay out a framework for doing so.  True, there is as yet no evidence to suggest that the 50p rate introduced last year has inhibited UK growth, but past experience can be an excellent indicator of the success (or lack thereof) of elevated top end tax rates.

In 1979, the highest UK earners were subject to an income tax rate of 83 percent.  Under this system, the top 1 percent contributed 11 percent of all tax revenues to the treasury.  Today, this same 1 percent pays more like 27 percent of total tax revenues.  What is more, the proportion of GDP taken in taxes and social security payments is greater now than it was in 1979.  In this respect, we are hardly under-taxed in the here and now.

In any case, it is probably too late for a tycoon tax to make its way into the Budget, having only been talked of by Nick Clegg very recently.  What could be done to make the rich pay their way, however, is to cut pension relief for the top few percent of earners.  This is hardly a trivial matter; pension relief effectively provides a 7 billion pound tax break for the richest in society.  Osborne has said that he will announce measures to close loopholes in stamp duty for high earners, which though certainly a step in the right direction, may not have as great a scope for revenue generation as Osborne believes.

Since this is supposed to be a coalition Budget, Osborne may also want to concede the introduction of a mansion tax should he decide to abolish the 50p tax rate.  Again, this will save face with the public to some degree.  But what Osborne really needs to boost his popularity is economic growth.  Fortunately, some of the infrastructure spending announced in the last Budget will come into effect next financial year.  If we are to believe the evidence that this spending can be three times more effective at stimulating growth than tax cuts, it may offer a ray of light in what will inevitably be a tough time for the Chancellor.

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