Budget 2012

Today's budget  will be intiguing. In the same way that Gordon Brown used to lay traps for the Tories, George Osborne has laid similar mines for Labour. The headline which the Government would like us to talk about is the increase in the personal tax allowance, but they must realise that the headlines will be grabbed by the 50% tax rate being reduced to 45%.

My own thoughts are that 50% is too high, and practice tells us that anyone earning enough to be in the high tax bracket also has the means to employ tax accountants who can use schemes to reduce the exposure to much less.  Unfortunately for many, they cannot comprehend that you get get more money out of the rich by having lower tax rates. Experience from the 80's when tax was reduced from 83% to 40% on the richest shows that this  truth exists, even if it is hard to grasp!

So, it's economically a good idea to have a competitive high tax band. Politically, though, it is difficult to explain and now the Government is on the hook to try to get the message across. The 50% tax rate is easy to understand, a lower rate bringing in more is difficult and so many people will think that this is the Tories being generous to their friends rather than trying to create a competitive tax system to out a booster under the economy.

Which brings us to the trap. Will Labour go into the next election promising to increase the rate back to 50%, maybe from a lower 40% rate? It is an axiom of modern times that parties lose elections by promising tax rises, so will they risk it even if it on the top earners? A party promising higher taxes on one section of society will be seen as a tax raiser on all.

The most disappointing aspect of the budget was the freezing of allowances for pensioners. This maybe a bigger story over the next few days and may come back to bite the Chancellor.

Squiffy.