Public anger at bankers this bonus season is running so high in the UK that Nick Clegg, deputy prime minister, openly boasts of wanting to "wring their necks". Such language, unimaginable before the financial crisis, betrays an understandable frustration. British politicians are discovering the limits of their ability to target irresponsible bankers without simultaneously damaging the UK's international competitiveness, not just in finance, but in all industries dependent on attracting and retaining mobile skilled workers.

Take the 50p rate of income tax on incomes over £150,000. Introduced in April 2010, the 10 percentage point increase was the largest seen in any European Union state. Those who seemingly despise bankers, a distressingly large proportion of the electorate, hail it as a progressive tax on City of London "fat cats". It is rapidly becoming clear, however, that it is a rather crude instrument for the collective punishment of this banker class, somewhat like the EU fishing quotas that encourage trawlers to catch and discard more fish than they ever take to shore.

Evidence for this has just come from Sir Nicholas Macpherson, the head of the Treasury. In a letter to the House of Commons public accounts committee, he revealed that the 50p rate is paid by three times more innocent bystanders than bankers. Out of 275,000 affected, only 63,000 – 23 per cent – work in "financial intermediation". Many of these collateral victims, of course, will be precisely the entrepreneurs the UK must attract to stimulate job creation and quicken its sluggish recovery from recession.

The result is that, just as countries need to compete for highly skilled labour as never before, the UK is seen as a high-tax economy. Out of 86 countries recently surveyed by KPMG, only three – Sweden, Denmark and the Netherlands – had top income tax rates higher than the UK's in 2010. The World Economic Forum's 2011 Global Competitiveness Report ranked the UK 95th out of 135 countries on the "extent and effect of taxation" (which measures the impact of a country's tax system on incentives to work and invest) – outperformed by financial centres such as the US and Switzerland.

It is also not clear that the 50 per cent rate will raise the revenue the then Labour government forecast in the March 2010 Budget. Back then, the estimated revenue was £1.3bn in 2010-11, £3.1bn in 2011-12 and £2.7bn in 2012-13. The first year of its operation therefore comes to an end this month, which means that the Treasury will in due course begin to have a sense of whether the 50p rate is actually making a meaningful contribution to the job of deficit reduction. Given the likelihood that it will trigger behavioural changes and diminish incentives to work, that is by no means certain. Some suspect it will lose the Treasury money, by forcing mobile businesses and employees offshore. Much depends on taxable income elasticity, which is hard to pinpoint accurately.

But even if the Treasury receives the revenues forecast in last year's Budget, they will be unlikely to compensate for the damage to the UK's international competitiveness. This leaves the government facing a dilemma. On the one hand, there are huge political difficulties in even signalling an intention eventually to cut taxes for the well-off (in line with reductions in all other rates of taxation and only once the public sector pay freeze is lifted) at a time of hardship for the poor and difficulties for many lower- and middle-income families. On the other hand, in a global economy, no prudent government will want to lumber itself with 1970s-style rates of personal income tax for a second longer than necessary.

George Osborne, the chancellor of the exchequer, has already outlined plans to give Britain the most competitive business tax regime of any major western economy. The coalition government has reversed planned increases in payroll taxes, lowered small business tax rates and is reducing corporation tax over four years to 24 per cent, its lowest ever rate. The UK tax regime was once seen as an asset. It can be again. A more competitive, simpler and more stable tax system will be better for everyone, rich and poor alike.


Jo Johnson is an FT contributing editor and UK member of parliament for Orpington. He is also a member of the public accounts committee