50p Rate was Doomed as the Dome as the Rich are Able to Avoid Taxes

DO YOU remember the Millennium Dome? Nowadays, it's mainly remembered as a political flop, but just over ten years ago, top government figures were confidently predicting that it would be so popular that it would be "the first line in New Labour's 2001 manifesto".

It was, they assured us, going to be a shining representation of Britain's technological prowess, creativity, and innovation. It could have been popular, but it wasn't.

Part of the problem was that the government just assumed it would be popular, without worrying too much about what to put inside it. In the end, the content simply wasn't much good, so an idea that had been justified on its popularity turned out to be not so popular after all.

Last year, Labour raised the top band of tax to 50p in the pound for those earning £150,000 or more, and made various other adjustments to make top-earners contribute more towards the national debt. At the time it was popular: polls showed that at least two thirds of people supported it.

But now we are seeing one big reason why it is a bad idea: it brings in barely any money. This is because, unsurprisingly, so many people up and down the country who should be paying it are not.

There are four main things these people are doing: one is paying themselves more than normal in the year before the tax rate is due to hit, and less afterwards.

Another is storing up pay in their firm to draw down into their personal accounts if and when the top rate is repealed in the future.

Some are giving more to charity. And a notable minority is even leaving the country. At any rate, the result is that now the Treasury says that it has "significantly reduced" its estimate of how much the new higher rate will bring in.

But then Labour knew it wouldn't bring in much money. They didn't really do it for the economics. They did it for the politics. The 50p band has symbolic value. They took polls about it in advance and found that asking the rich to contribute more would be popular.

But the big problem is that it looks like the 50p rate is turning out to be bad politics as well.

The symbolism of a 50p rate cuts both ways. Although the wave of post-crash anger made it popular at the time, the news that it is more symbolic than effective leaves a nasty taste in the mouth to many people, including many who earn well under the threshold.

It means that in the election campaign it is likely to be attacked more loudly than it can be defended.

In short, like the Dome, the only thing going for the 50p rate last year was that it was popular at the time. Like the Dome, it was a policy put in place on the basis of a wave of sentiment, without the policymakers knowing the underlying reason for it.

And like the Dome, it is fast turning into an electoral liability for Labour. This week's news about just how little money it has brought in underlines that.

And that leaves Labour with a nasty electoral choice. Leave the 50p rate in place, and fight the election defending an ineffective, unpopular tax.

Or scrap it, and look like flip-floppers and tinkerers, first for abolishing the bottom 10p rate then having to offer compensation for it, and now on the 50p rate.

More and more, it looks as if Labour's 50p tax rate is not just bad economics, it's bad politics too.

Azeem Ibrahim is a Research Scholar at the International Security Program, Kennedy School of Government at Harvard University and the chairman and chief executive of Ibrahim Associates.