Truss and Her Tax Rate U-Turn – What You Need to Know
It has been a turbulent time for embattled Prime Minister Liz Truss, whose recent approval rating of -47 is worse than Boris Johnson’s at the height of ‘Party Gate’ and Theresa May’s during the final days of her ill-feted reign.
At the heart of this issue is Truss’s controversial economic policy, which featured sweeping and untargeted tax cuts while also scrapping the 45p tax rate for the UK’s highest earners.
However, Truss and her Chancellor Kwasi Kwarteng have since U-turned on the latter policy, but why is this the case and will it be enough to safeguard the PM’s immediate future?
The Truth About the 45p Tax Rate
There are four primary tax bands in the UK, the highest of which applies a levy of 45% to anyone who earns in excess of £150,000 every year.
Scrapping the “45p” rate, so-called because it takes £0.45 for every £1 earned by those who meet the earnings criteria, was a key component of Truss’s economic policy, which she claimed would drive growth by reducing the tax burden on the UK’s wealthiest citizens.
We’ll touch more on the efficacy of this particular policy a little later in the piece, but it would have applied to more than 600,000 UK workers who currently earn more than £150,000 per annum.
Scrapping the band would have delivered an average yearly tax cut of £10,000, creating a significant break for a handful of fortunate earners nationwide.
The U-Turn – Why Has Truss Abandoned the 45p Rate Scrap?
Broadly speaking, Truss’s economic plans represent a repackaged version of ‘Reaganomics’, which espoused trickledown economic theories and focused on sweeping tax cuts, reduced social spending and further deregulation of domestic free markets.
The issue with trickledown policies of this type is that they’re demonstrably ineffective, particularly in free market economies where there are no real mechanisms to help ensure that tax breaks for the rich translate into benefits for all.
As a result, the financial markets reacted with horror to Truss’s plans when they were announced, as the pound plunged to record lows against the dollar, CFD traders hedged against the GBP and the Bank of England (BoE) was forced to pump billions of pounds into failing bonds and pension markets.
Even senior members of Truss’s own party were quick to round on the new Tory leader, fearing a backlash at the polls as Labour opened up an unprecedented 25-point lead over their rivals at the beginning of October.
These facts, coupled with concerns over the rising base rate of interest and an increasingly unstable housing market, has forced Truss to reconsider he plans and particularly the optics of the 45p tax rate removal.
As a result, Kwasi Kwarteng announced the decision to reverse the 45p tax rate in an early morning tweet, claiming that “we get it and we have listened” before reaffirming the decision in a formal speech.
The Last Word
Undoubtedly, this has been a disastrous start for Liz Truss, who could well face herself the subject of a leadership challenge as Labour surge ahead in the polls.
Her credibility is certainly in pieces, after initially agreeing to a bizarrely vague and untargeted set of economic policies and then failing to have the courage of her own convictions as the pressure poured on.
What’s more, the decision to scrap the 45p tax rate could be the first of many Tory U-turns, meaning that further battles will lie ahead for the new PM.