Why George Osborne is wrong on the 40p tax rate

18 Mar

People are happy to pay more tax as it makes them feel more successful, apparently.  People are comfortable with nearly half of every penny they earn above £41,450 going to the taxman, apparently.

Of course, this is nonsense, as no sensible individual likes handing over more of their hard-earned money to the Treasury than they are required to do.


But, bizarrely, this is what the Chancellor is reported to have told a group of MPs in a private meeting of the 1922 Committee just two days before his penultimate budget before the next general election.


George Osborne allegedly said that middle incomers feel good about themselves when paying more tax because “it means they feel they are a success and are joining the aspirational classes.”


The Chancellor’s ‘observations’ come ahead of tomorrow’s 2014 budget in which he is expected to reduce the threshold for the 40p tax, thereby dragging more middle-class workers into the higher band.


His aides have moved to partially deny the embarrassing comments, but many of those who were there claim the reported statement is broadly what was said.


To my mind, this statement is not only inherently misguided but deeply patronising to the so-called “aspirational classes”. I don’t know any middle income workers who would relish the thought of paying more tax so they would feel more of “a success.”  Do you?


But whilst what Osborne has reportedly said may have been questionable, what is beyond doubt, in my opinion, is that the move not to give relief on the 40p tax rate is incredibly short termist.


Why short termist? Because increasing the tax burden on more and more middle class workers by pulling them into the top band will result in a significantly higher proportion of the population with a reduced ability to save for their futures.


With many of today’s workers likely to spend three decades in retirement we need to remove all possible barriers to saving and offer more rewards for putting money aside for older age.  Being financially secure will not only benefit the individual and their families as they will be able to enjoy the retirement they want, but it will also benefit the state as they will be less dependent, meaning lower medical and care costs – costs which are a major concern due to the UK’s ageing population.


Another reason why this measure is short termist is because it acts as a disincentive for middle income workers from wanting to earn more, a disincentive to working harder, a disincentive to securing promotion – in short, it serves as a disincentive to aspiration.


All this is clearly to the detriment of the British economy, both now and for the longer-term.

Nigel Green deVere Group

Blog written 18th March




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