Dominic Lawson: A simple question for those who want to see our taxes raised: are you a hypocrite?


The principal of St Hugh's College, Oxford, recently subjected Treasury civil servants to a tricky little exam. It included the following multiple choice question: What share of national income tax receipts is contributed by the highest 1 per cent of earners? Is it A. 5 per cent? B. 8 per cent? C.11 per cent? D.14 per cent? Or E. 17 per cent?

Perhaps you know the answer. If so, you are doing much better than the majority of those who are meant to be informed about such matters. Only 19 per cent of the Mandarins answered "E", which is the closest to the truth. Not one of them wrote "None of the above," which would have been the most well-informed response.

As the Government's own published statistical handbook reveals, the top 1 per cent contribute 21.8 per cent of total income tax – a proportion which has been pretty much constant every year this millennium. The same booklet shows that the top 10 per cent contribute well over half of the aggregate income tax collected by the Inland Revenue.

These figures seem slightly counter-intuitive, so insistent has been the complaint that under New Labour the rich have increasingly shirked their responsibility to pay an appropriate proportion of the bills of the welfare state.

It is certainly true that punitive tax rates for the rich no longer exist; but the consequence of the removal of those rates – as long ago as 1988 – led swiftly to an increase in the proportion of total tax revenues paid by those at the top of the income pile.

This is not so surprising, really: if a government levies a 100 per cent tax on something or someone, it will very soon receive no revenues at all from that source. As the rate is reduced, the sum received will tend to rise, although not indefinitely: a nil rate, of course, will also produce no revenues. The trick for modern governments is to establish the optimal rate, in which the maximum is realised with the minimum of fuss.

It was the desire to avoid such fuss that drove the Chancellor of the Exchequer to double the inheritance tax allowance – although only for couples who happen to be married. Many on the left of British politics were furious about this, which they described as a craven copying of a "populist" Tory pledge to remove inheritance tax from all estates worth less than £1m.

The critics seem to regard as immoral the desire of propertied families to hand on as much as legally possible to their children rather than to the state. If that is the case, then Tony Benn, the conscience of "Old" Labour, is immoral in exactly the same way. The Mail on Sunday recently published details from Land Registry records which show that soon after the death of Tony Benn's beloved wife Caroline, his three children became part-owners of his Holland Park house – allegedly worth £4m. One of those children is the cabinet minister, Hilary Benn.

According to "tax experts" this change in the ownership of the house would have been the result of a deed of variation: "a legal procedure whereby a will can be altered posthumously to use up a spouse's zero-rated death duty allowance. The transfer to the Benn children means when their father dies his estate will be smaller and therefore the inheritance tax bill will be lower."

This is not a criticism of Tony Benn. He did what the vast majority of fathers would do in such circumstances. The point, however, is that he was absolutely free not to make such financial arrangements – indeed it would have involved no effort at all – in which case a greater sum of money would have gone to finance public expenditure.

Do you know anyone who disapproves so much of inheritance that he or she has irreversibly decided to leave everything to the Inland Revenue? Very occasionally one reads reports of some old lady who leaves such a will; my immediate response is not to praise the deceased's public-spiritedness, but to think what a lonely and loveless person she must have been.

Similarly, of all the people you know who believe that "we should pay more tax", how many of them actually volunteer to pay more than the revenue requests as a minimum? It is, after all, a floor and not a cap: there is nothing to stop people paying a bit extra.

What this indicates is that those who claim that it's virtuous to pay higher taxes either would rather everyone but themselves did so, or at the least find it in practice repellent to do so themselves unless compelled by the state.

Such arguments might seem obscure or even academic, but this week they have burst into public debate in the United States, following remarks by the world's wealthiest investor, Warren Buffett. At a $4,600-a-seat fundraiser for Senator Hillary Clinton, Mr Buffett declared that the rich in America were not paying enough by way of taxes – and by way of illustration he pointed out that his effective tax rate last year was only 17.7 per cent, whereas his secretary, who earned $60,000, was taxed at 30 per cent.

This provoked a furious response from Republicans, a number of whom pointed out that, a) a man with a net worth of more than $50bn and a highly complicated global business empire should pay his PA a lot more than that, and b) the said PA, even if she were single and with no dependants, ought not to be paying federal income tax at an overall rate of more than 16 per cent, which means that, c) Mr Buffett should offer his accountant's services to his secretary.

In reply Mr Buffett's defenders pointed out that the Nebraskan tycoon "had put his money where his mouth is" by his stated decision to leave his extraordinary fortune to the Bill and Melinda Gates Foundation.

On the contrary, by leaving his money to a charitable foundation, Buffett is doing exactly the opposite: in the US all such charitable bequests are tax deductible.

His pledge to the Gateses is in many ways very admirable, but it absolutely guarantees that the US tax man will not get his hands on any of the Buffett $50bn. Mr Buffett clearly believes that the Gates foundation will spend his money wisely – on eradicating malaria, for example – while Uncle Sam will mismanage and fritter it in ways which he would find deeply objectionable.

It is true that capital, because of its mobility, is undertaxed relative to income, both in the US and in the UK. This can have apparently anomalous results, of the sort to which Buffett has drawn public attention. So I have little sympathy with the businessmen moaning at the increase in the effective rate of capital gains tax proposed by Alistair Darling. This still doesn't mean that the rich – or indeed any of us – pay too little income tax.

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