The Budget: I was wrong about the 50p income tax rate

Cunning negotiating strategy or basic mistake? Whatever the view you have of the tax motion at Liberal Democrat conference and Stephen Williams’s speech moving it, my interpretation of it was wrong.

Far from signalling the determination of the party’s leadership to see the 50p tax rate remain, it was, in fact, a sideshow and the rate will go. A kind interpretation is that standing by the 50p rate so publicly was part of a negotiating strategy to extract greater concessions from the Tories on other tax changes. A less kind interpretation is that it was a mistake to put to party conference a motion supporting the 50p rate just before agreeing to drop it, even if in return for other changes.

In fact, shortly after I posted my interpretation, two different close advisors to Nick Clegg told me, in not so many words, that it was wrong. They were carefully not to directly diss Stephen Williams’s choice of words or the phrasing of the motion, but the sentiment was very clear. That sentiment has been backed up numerous times since by the media stories. So it looks a very safe prediction that the 50p rate will go.

Both Nick Clegg and Danny Alexander had been careful in their own comments to leave caveats about the 50p rate – making it not a point of principle that one particular tax band must have one particular rate, but rather than the tax system must overall be changed in a fairer direction. As Clegg put it in November:

Mr Clegg made clear that the Liberal Democrats would back abolition of the 50p rate in the long run only if it is not raising much revenue and if it is replaced by new taxes on “unearned income”. These could include a 1 per cent annual “mansion tax” on homes worth more than £2m, a land tax, and restricting tax relief on pensions to the basic 20p rate.

If that line has been held, what it means for the Budget is the 50p rate going, along with higher taxes on the richest or smaller tax breaks for them. Despite the frequent mention of a Mansion Tax, it would be surprising if the Tories and Lib Dems were keen to introduce it promptly given that the area which would be hit most by it has elections this year but not next – London.

With George Osborne, Vince Cable and the Treasury mandarins all keen on a Mansion Tax of some form or other, the odds are that delays in introducing it are just that rather than a polite form of cancelling all plans.

That delay in introducing a new wealth tax points towards the 50p rate reduction not being all in one go. However, for the Conservatives, there is political advantage in the abolition being announced this year – knowing that the move’s unpopularity means it is better announced a long way out from the next general election.

The challenge for the Liberal Democrats is that promises about making the richest pay more by cracking down on tax avoidance and evasion do not sound new or credible. It has become a regular part of Budgets for the Chancellor to promise this. A new round of promises this week will need to have enough substance to make them sound more significant than just a repeat of the usual formalities.

Likewise, speeding up the moves towards a £10,000 allowance would be very popular, but of limited political gain for the Liberal Democrats as getting to £10,000 is in the Coalition Agreement already. Speeding up implementation would be good as it would bring more benefits, sooner. But it is a relatively small gain.

That is where Nick Clegg’s floating of a ‘tycoon tax’ just before the Lib Dem conference is significant. Why suddenly float a new policy idea at that time, without having previously put in a motion to the conference on it nor waiting until the Autumn conference for a debate?

The answer is that it was part of the semi-public Budget negotiating dance – taking an issue that had come up during the talks and getting out in the public domain that this is a Liberal Democrat idea so that when the Budget delivers on it or something very similar, the Lib Dems get the credit.

So goodbye to the 50p rate, hello to a form of the tycoon tax and other tax rises from the richest, and get out your telescope to hunt for a Mansion Tax somewhere on the horizon.

Score me out of three come Wednesday evening.

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