New top tax rate to be introduced to help pay for VAT cuts – but not yet

Another political trick, designed more to stifle the opposition than achieve anything significant, is the leaked plan to introduce a new higher rate of tax – but not now. It will be in the Labour Party Manifesto for the next General Election which may run to 2010 but is now rumoured for a possible June 2009 date.

Should Labour win that election, a new tax rate of 45% will be applied to those earning over £150,000 per annum. This is 2% of the workforce, estimated by the Institute of Fiscal Studies as affecting 400,000 people.

In the meantime informed rumour – meaning strategic leaking – indicates that VAT will be cut by around 2.5% to stimulate spending.

The higher rate tax band is not going to frighten the horses. It’s little more than gesture politics. 5% is a very small rise which will not significantly hit the deep pocket. Someone on £250,000 a year will pay only an additional £5,000 in tax. Also – given the spending power and habits of the very rich, they will save at least as much from the predicted 2.5% VAT cut than they will lose in paying a little more tax.

Tomorrow (Monday 24th November) all will be revealed when, as one political commentator put it, Gordon Brown allows Alistair Darling to read out the pre-budget statement he himself has formulated.

Expect generosity that will be more apparent than real. Expect a June election. Expect that, whoever wins that election, the truth about our financial situation and the long-term burden on all of us will then become painfully clear.

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