New higher rate of tax could be 'harmful' to the economy

A think tank has argued that the new 50p tax rate could be damaging to the UK’s economy.

The Centre for Policy Studies has claimed in a new report that the proposed 50p tax rate for those earning over £150,000 a year will raise only a small amount for the exchequer but runs the risk of deterring entrepreneurs.

The report pointed out that the tax band would, even by the Treasury’s own estimates, secure just £2.4 billion.

However, the report went on to say that the tax rise will mean that many entrepreneurs will avoid the UK, harming both the economy and leaving the Treasury forecast looking over-optimistic.

In a further criticism of the Chancellor's decision, the report claimed that the measure is also unfair as the withdrawal of some personal allowances will lead to widely variable marginal rates, reaching 61.5 per cent for those earning between £100,000 and £112,000, while those earning more will face a lower rate.

Far from moving the UK’s tax system towards a more simple regime as is the government’s aim, the new tax will actually complicate the way the system works, the CPS said, as the Finance Bill 2009 is set to introduce 16 different personal tax rates.

Jill Kirby, one of the authors of the report, said: "In his Mansion House speech last week, the Chancellor hinted that he may take further steps to penalise the better off. But it is time to recognise the long term damage that this political manoeuvring will do to the British economy – and abolish it as quickly as possible."

Corin Taylor, senior policy adviser at the Institute of Directors which backed the report, said: “The 50p rate sends out all the wrong signals to the entrepreneurs who are key to pulling the UK out of this recession. Green shoots of recovery will wither and die if business leaders leave or choose not to come to this country because of the higher tax rate.”