Soak the rich, Vince? There aren't enough of them to tax

  • @TheIndyBusiness

How can we crank more money out of the tax system? Can we make the the rich pay more? And what other options are there to increase revenues?

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These practical questions facing the Coalition have been very evident this week, but of course they will run far beyond the life of the present government. They go to the very heart of what kind of society we want to be. It is a hugely important debate but one in which the practicalities tend to get ignored, so the best place to start is to look at the numbers.

For the past 35 years, the entire working life of people approaching retirement now, the tax take in the UK has been around 38 per cent of GDP. It was a bit higher in the early 1980s and a bit lower in the early 1990s but for the past 15 years it has been extraordinarily stable, as you can see in the first graph.

Public spending, by contrast, has shot up and shot down, ranging between nearly 50 per cent of GDP and 36 per cent. So if we want to get more out of the tax system we have to do something that has not been done for 35 years.

Now look at how we raise tax. The estimates from the Office for Budget Responsibility suggest that tax revenue this year will be about £550bn. Out of that, £350bn comes from just three taxes, £150bn from income tax, and £100bn apiece for national insurance contributions and VAT. After that comes corporation tax at £45bn, and £25bn each from fuel duties, business rates and council tax. Alcohol brings in £10bn, tobacco another £10bn but after that the revenues are tiny. For example, inheritance tax brings in only £3bn, as do stamp duties on share trading, and air passenger duty. Capital gains tax is only £4bn.

So you see the problem. We could bring in a wealth tax but not only would that create awkward questions – do you include the value of people's main home? – it is hard to see it bringing in more than inheritance tax or capital gains tax.

We could have a mansion tax but again it is not realistic to expect it to bring in more than £5bn and probably much less. We could increase corporation tax but what would that do to companies' investment plans?

The simplest way to boost revenues is not to fiddle about with little taxes but to get the additional money out of the three big ones.

Income tax is the prime candidate, with the top 1 per cent of earners already paying more than a quarter of it and the top 10 per cent about half.

But as we have seen (and as the Institute for Fiscal Studies predicted) increasing the top tax rate to 50p has not brought in any additional revenue. Income tax receipts this year are down, not up. It may be that more revenue can be extracted from income tax but that would probably have to come from the 40 per cent band – the top 10 per cent rather than the top 1 per cent.

National Insurance Contrib-utions could also be increased on higher earners but again to get significant sums you have to go down to people who would not consider themselves rich.

As for VAT, you could have a special luxury rate on whatever are deemed inessentials – perfume, expensive wine, top-end cars – but the only way to bring in big money would be to extend its range. That is what much of Europe does but it is hard to see us extending VAT to food.

The core of the problem is not so much that very rich people are adept at avoiding tax. It is that there are not enough of them.

Yes, we could squeeze a bit more out of the tax system and yes, the very rich could be made to pay a bit more. That is clearly what will happen. But if we want to get above that 38 per cent of GDP in tax it will be the upper-middle band of earners who will have to pay the bill.