Call for top tax cut divides UK govt

LONDON (Reuters) - Britain's Liberal Democrats, junior partners in the governing coalition, will oppose a cut in the top income tax rate until allowances for the lowest paid are raised further, a party source said on Wednesday.

A group of high profile economists on Wednesday urged Conservative finance minister George Osborne to ditch the top 50 percent tax rate "at the earliest opportunity" to boost growth.

A senior Conservative minister said he too would like the tax to go -- fuelling coalition tensions over the issue.

Scrapping the tax could be politically damaging for the coalition when the government is committed to austerity measures to cut a record budget deficit.

"Our first priority is tax cuts for low and middle income earners, not the richest people in the country," a Liberal Democrat source said.

"We are not going to prioritise tax cuts for people at the top at a time when everyone is feeling the pinch."

The Liberal Democrats' coalition agreement with the Conservatives rules out other tax cuts until personal income tax allowances are raised to 10,000 pounds ($16,000), the source noted.

The tax-free allowances were raised in the coalition's last two budgets but are still only around 7,500 pounds.

In a letter to the Financial Times on Wednesday, the economists said they were concerned the tax was "doing lasting damage to the UK economy".

"Only by returning to an internationally competitive tax regime will Britain enjoy long-term sustainable economic growth," they added.

The signatories included Bob Rowthorn, of Cambridge University, and two former members of the Bank of England's monetary policy committee, DeAnne Julius and Sushil Wadhwani.

Communities Secretary Eric Pickles backed their call.

"I do think it should be got rid of -- forgive me for using this phrase -- when the time is right," he told BBC Radio 4.

"There is a strong and reasonable case for saying come on, this isn't actually contributing very much. On balance it's probably doing more damage than it is doing good."

The 50 pence rate was introduced by the former Labour government in April 2010 on annual taxable incomes above 150,000 pounds, which the Treasury hoped would eventually raise 2.7 billion pounds a year.

A figure of 150,000 pounds is more than five times average earnings and only the top 1 percent of the population earn that much.

"It is often portrayed as a justified tax on the rich but the economic damage it causes means that it is against the interests even of ordinary workers who don't pay it," the economists wrote.

The Treasury said that Osborne regarded the tax as a "temporary measure" and had asked revenue officials to analyse how much it raised.

"The Government is committed to a competitive tax system, but in reducing the deficit, we have always been clear that those with the broadest shoulders should carry the greatest burden," a Treasury spokesman said.

($1 = 0.625 British Pounds)

(Additional reporting by Keith Weir and Stephen Mangan; Editing by Ruth Pitchford)