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Scrap 50p, raise the personal allowance, and more besides

    Another day, another group of business leaders who suggest tax cuts are necessary to help stimulate growth. In a letter to the Chancellor this morning, 30 City leaders called for immediate action to boost confidence in the economy, with the removal of the 50p tax rate and an extension of the personal allowance by £1,000 for next year their key demands.

    Two weeks ago, I appeared on a Paul Mason Newsnight piece to explain why tax cuts are needed. The UK has gone from having the 4th most competitive tax system in 1997, to the 94th today. Our complex system is not only unattractive for wealth generators and foreign capital, but also produces perverse incentives for those much lower down the income scale.

    As part of a ‘coherent and consistent’ plan for growth, as called for by Andrew Tyrie MP, it is essential that both the burden and complexity of our current tax system are examined. But a perception of an obsession about the 50p rate alone means that many conservatives do themselves no favours in winning the hearts and minds of struggling families who would only dream of being in that income bracket.

    That’s why it is essential that an argument for tax cuts makes the both moral and economic case, seeking to lower the burden across the board. As part of my Adrenalin Now piece published last month, I argued that the Government could make further substantial cuts to Corporation Tax (to 21%), employers’ NICs, abolish the 50p rate AND raise to the personal allowance to £8,600 next year through abolishing higher rate pension tax relief, capping foreign aid at 2010 levels, scrapping the pension tax-free lump sum and ending contracting out of the second state pension.

    Some of the savings identified are tough decisions, but many have been suggested by others elsewhere. Just yesterday, Centre Forum’s Chris Nicholson wrote for Conservative Home on the ineffectiveness of pension tax relief, which increasingly does not act as the deferred taxation of pensionable income to encourage saving as it was originally intended. Capping it at 20% could save the Government £7 billion. Others, like Andrew Tyrie, have identified that increasing the foreign aid budget is a policy more akin to an age of abundance than an age of austerity. Likewise, our CPS pensions expert Michael Johnson has long identified the contracting out of the second state pension as low-hanging fruit.

    Taken together, these policies can help to create a consistent tax cutting policy for growth: lowering the costs of employment (through cutting employer NICs), attracting foreign capital and wealth creators (through cutting Corporation tax and abolishing 50p) and easing the burden on working families (by substantially increasing the personal allowance).

    The truth is, George Osborne is being disingenuous when he says that tax cuts can’t be made now. They can, and they must. It just requires the same explanation and leadership that he displayed this week in front of European leaders on the Financial Transactions Tax. And there’s little reason to think that these would not be popular. As the polling undertaken by ComRes for Adrenalin Now showed, the public are supportive of the removal of the 50p tax rate if accompanied by a large increase in the personal allowance. Likewise, they realise that cutting the cost of employment is essential to creating jobs. But perhaps most importantly, more of the public want tax cuts than increases in spending!

    So rather than committing public funds to new projects and ‘support’, let’s really start supporting the recovery, by cutting taxes, attracting wealth and incentivising employment. It won’t give the ‘X number of jobs saved’ headlines that many politicians crave, but it will have an immeasurable positive effect on confidence and activity.

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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