This is becoming familiar. With each party conference it has held since joining the Conservatives in a coalition, the Liberal Democrat parliamentary party seeks (with mounting desperation) to differentiate itself from its partners in Government.
And once again, Messrs Clegg and Cable have decided that attacking “the rich” is the best way to do this. Not a bad idea, actually, if it’s only image you are concerned about. There is no doubt the Tories do suffer electorally from being identified by millions as a party representing only the interests of the toff class. In fact, this week the Lib Dems might have achieved their objective merely by declaring that, unlike one of the Cabinet’s Tory ex-public schoolboys, they would never dream of treating the police as if they were uppity peasants, or recalcitrant family retainers.
However, the party conference “differentiation” agenda had already been written: it was to consist of Nick Clegg declaring that the “top 10 per cent” must pay more tax, and Vince Cable thundering about those British who choose to reside in tax havens such as Monaco, which, quoting Somerset Maugham, he described as “a sunny place for shady people”.
I always enjoy the Liberal Democrats on this theme, if only for the sheer incongruity of it. After all, it was the personable Liberal Democrat Chief Secretary, Danny Alexander, who appointed Sir Philip Green to be the Government’s adviser on how to “cut wasteful spending” in Whitehall. This would be the same Sir Philip Green whose Arcadia business is in his wife’s name; since Lady Green is a Monaco resident, this allowed the Green family to extract a £1.2bn dividend from Arcadia, free of tax.
Then there is Baron Oakeshott of Seagrove Bay, the most outspoken of all the Lib Dem legislators in denouncing tax avoidance, which he describes as “terrible... anti-social and has no place in a civilised society”. Yet the undeniably rich Lord Oakeshott derives his own fortune from part-ownership of an investment trust manager called OLIM. The principal attraction of an investment trust, as one financial circular explained it, is: “It can trade in and out of its investments without incurring capital gains tax.”
But let us not be distracted by what must be accidental oversights by these men of the highest principle. We should take what they say at face value and ask, not whether they are the right people to say it, but whether or not it makes sense. Is it, in fact, the case that the well-off in Britain are not pulling their fiscal weight? Is the existing tax system dreadfully slanted in favour of the very well-off and careless of the needs of the least well-remunerated?
Best to go straight to the horse’s mouth, which in this case is Her Majesty’s Revenue and Customs. Its figures for 2011/12 show that the top 1 per cent of income earners paid 24.8 per cent of all income tax collected: the same group’s earnings were 11.2 per cent of the total. This fact helps to explain just why the Treasury gets so jumpy at the thought of more top earners joining Lady Green in Monaco: the tax base increasingly resembles an inverted pyramid, so it wouldn’t take much for the whole thing to topple over.
This, more or less, is what has happened in California. By far the most populous of all the states of the Union, it had reached a situation in which almost half of all net income taxes were being paid by the top 1 per cent of earners. When enough of them moved out, or fell on hard times, it was a substantial cause of a series of municipal bankruptcies – as a result of which a number of Californian cities are no longer able to pay the pensions of former state employees.
That, in part, is the background to the now notorious remark by the Republican presidential candidate Mitt Romney, to the effect that almost half of the voters pay no income tax and will vote for Obama no matter what, because “they are dependent upon government, who believe that they are victims”. This was staggeringly bad politics on Romney’s part, not least because a significant portion of those people he stigmatised vote Republican.
Yet the basic US fiscal structure is pretty much as Romney described. As a matter of fact, it was mostly Republican presidents, such as Ronald Reagan and George W Bush, who created this giant system for the creation of fiscal deficits: this is what happens when you narrow the tax base and increase public spending. The Harvard economics professor Greg Mankiw observed a couple of months ago on his blog that the most recent figures from the Congressional Budget Office on the distribution of income and taxes showed that the effective tax rate in the US is not negative just for those in the bottom two quintiles (ie, the bottom 40 per cent); even the middle quintile were net recipients. Or, as Mankiw expressed it: “The middle class, having long been a net contributor to the funding of government, is now a net recipient of government largesse.”
Inspired by this observation, Britain’s own Centre for Policy Studies has attempted a similar analysis of the fiscal position in the UK. It has shown me its provisional figures, which reveal a very similar situation. It is clearly a complex business to work out the value of all benefits at every income level, so the numbers need to be treated with caution, especially because many in the lower-earning brackets will be retired people. None the less, the figures are striking.
According to the CPS, in the year 2010/2011 taxes less transfers as a proportion of original income were minus 211 per cent for the lowest quintile, minus 85 per cent for the second lowest quintile and minus 23 per cent for the middle quintile. It is only when you get into the top 40 per cent that people begin to be net contributors.
The truth is that both in the US and (to a lesser extent) the UK, governments have for years acted efficiently as vote-maximisers with their tax and spend policies: increasing the number of those eligible for benefits while reducing the number called upon to fund them. Result (as Mr Micawber might have put it): misery, in the form of a colossal national debt. The rich will indeed have to pull their weight in order to help pay this down, probably with higher council tax; but it is fatuous for any numerate politician to pretend that this is where the fiscal problem lies.
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