Thinktank says 50% tax rate review is too narrow

HM Revenue & Customs’ review of the 50 per cent tax rate will not be broad enough to properly assess whether to cut the tax or not, according to the Institute for Fiscal Studies.

Chancellor George Osborne asked HMRC to look into the tax rate and its revenue last year. It is expected to report back soon.

In a pre-Budget assessment of Government finances, the IFS says although reforming the tax system to promote long-term growth should be high on the Government’s agenda, the Treasury should not rush into any decisions over cutting the 50 per cent rate.

Director Paul Johnson says the Treasury’s previous analysis suggests that a “very considerable degree” of behaviour change, avoidance and evasion is caused by the 50 per cent rate and that only considering its impact on revenues is too narrow a basis for making an assessment.

He says: “The tax system needs reforming to help promote growth in the medium and long run. Time needs to be taken if real evidence of the effect of the 50 per cent income tax rate is to be gathered.”

Last month, reports suggested that HMRC’s review will show a surge in tax revenues totalling hundreds of millions of pounds in the year after the 50 per cent rate was implemented in April 2010.

It has also been reported that Prime Minister David Cameron and Osborne consider it unlikely that the tax will be cut in the near future because of the political implications of doing so.

In November, the Centre for Economic and Business Research published a report claiming that the top tax rate could cost the Treasury up to £1bn. It said the tax pushed people beyond a “psychological threshold” and encouraged them to minimise their tax exposure.