Don't listen to the crude lobbying of the right – the rich do not bear the greatest tax burden

The wealthiest groups are paying a larger share of the total tax take simply because they have larger slices of the pie than they used to

Ben Chu
Tuesday 21 March 2017 15:43
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The libertarian novelist Ayn Rand claimed that taxes on the rich were economically destructive
The libertarian novelist Ayn Rand claimed that taxes on the rich were economically destructive

Death and taxes, as we all know, are the two great guarantees of life. But a strong candidate for a third is crude anti-tax lobbying by the right-wing press. Their favoured argument in recent years has been that the “burden” of taxation is falling ever more heavily and unfairly on the very rich.

The Daily Telegraph this week presented an analysis showing that the top 1 per cent of income tax payers pay 27 per cent of all income tax receipts, up from just 11 per cent in the 1970s. The report also noted that the top 10 per cent of taxpayers account for 59 per cent of total receipts, up from 35 per cent in 1976.

It asserts that “the wealthy … are making a bigger contribution to the UK’s income tax receipts than they have done at any other point during the post-war era”. The piece throws in references to the pledge from the late Labour Chancellor Denis Healey to squeeze some unfortunate souls until “the pips squeak” and warnings from a Conservative MP about how oppressive taxes are in danger of deterring smart people from working.

Labour backs Tory income tax cut for top 15 per cent of earners

But the analysis, like many previous ones in the same vein, is misleading because it neglects to mention a crucial piece of context, namely that the very rich have been getting richer in recent decades – especially those at the very top.

According to the World Top Incomes database, the total pre-tax income share of the top 1 per cent of UK earners has doubled since the 1970s from 6 per cent to around 12 per cent, largely a reflection of the explosion in pay of financiers and senior company executives. The pre-tax income share of the top 10 per cent has also risen since over that time from 30 per cent to 40 per cent. These groups are paying a larger share of the total income tax take because they have larger slices of the pie than they used to.

This says little about the direction of tax policy. Rather, it’s an arithmetic property of a progressive income tax system, whereby above certain thresholds a fixed proportion of earnings go to HMRC.

It's also irritating that those on the right who complain about over-taxation of the income of the rich are also often quick to point out that UK post-tax income inequality has been under control since the early 1990s and that concerns about inequality are therefore grossly overblown. How do they imagine that the latter result has been delivered?

Another vital piece of context which these analyses omit, as Jonathan Portes of King’s College London exhausts himself in stressing, is that income tax is not the only tax. In 2015-16 the Government raised £630bn in taxes. Of this just 27 per cent (£169bn) came from the income taxes. Very large chunks came from National Insurance (£114bn), VAT (£116bn) and corporation tax (£45bn).

It is either ignorant or disingenuous to imply that the entire national tax burden is accounted for by the income tax take. Any consideration of the social fairness of the tax system has to factor in the incidence of other levies to be even vaguely credible.

There are, it is true, challenges presented by the disproportionate reliance of HMRC on a relatively small number of high-income individuals. But despite the complaints of Tory MPs and right-wing newspapers these challenges have nothing to do with equity or Ayn Rand-style effort deterrence.

This is rather an issue of practicality. The rich can shift their incomes about ominously easily, as we saw vividly last year when a change in the taxation of dividends prompted large-scale income forestalling. An army of well-resourced accountants generate (entirely legal) avoidance schemes, leaving HMRC outgunned and ministers chasing their tails.

A part of the solution ought to be to shift the focus of taxation from income to residential property, where wealth inequality is vast and avoidance is much harder. The capital gains and inheritance tax systems are also in crying need of reform. The tax rates on the income of company owner managers should be brought into line with that of employees to eradicate an obvious avenue for avoidance by the very wealthy.

But we should also be trying to reform the structure of our economy, which throws up such large pre-tax disparities in pay. Pay at the very top is sometimes a reward for outstanding effort, inspiration and entrepreneurial activity. But often it is merely zero-sum wealth extraction and the exploitation of uncompetitive markets.

A more equal distribution of earnings would make the tax system less fragile. There are also reasons to suspect this could result in more sustainable GDP growth due to higher corporate investment and productivity.

A new tax campaign angle for the right-wing press? Don’t hold your breath.

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