"In the CPS’s Growth, growth, growth paper, I examine whether tax cuts could be used to stimulate the economy. Over the decades politicians have enjoyed tinkering with personal tax rates – whether seeking votes in return for lower taxes, or arguing that higher taxes can be spent on “better” public services.
Having a few more pounds in your pay packet at the end of the month is good news. But how can policy makers know that we will use the extra cash in a way that will stimulate the economy? We might spend it, but we might use it to pay off debts, or add to our savings. All these actions have positive macro-economic aspects, but only extra spending that boosts business will help the private sector growth that the Coalition is aiming for.
One way we can change personal taxes to encourage business growth, is by reducing the 50 per cent top rate. This is a politically difficult issue – and justifying a tax cut for the wealthiest is not an easy sell. But any tax that hampers the UK’s competitiveness and in turn reduces the overall tax take does not make economic sense whatever your own income. There is no doubt that having the fourth highest headline rates of personal taxes in the EU is affecting the UK’s attractiveness to those that will create jobs.
The Swiss Federation Migration Office has seen a 28 per cent increase in the number of bankers relocating from the UK to Switzerland following the introduction of the higher rate. Those bankers were generating wealth in the UK and would have paid an estimated £53m of tax which pays for quite a few nurses and teachers – and their pensions.