One of the my favourite Spitting Image sketches features the Queen complaining about the behaviour of the rich, to which an exasperated Prince Philip replies, “You ARE the bloody rich!”
The rich are always somebody else. As Gaby Hinsliff says, there’s always someone with bigger yacht. So it was inevitable that John McDonnell would get flack for suggesting that the rich who should pay more tax are those earning over £70,000 a year. “We’re not rich,” said lots of people who live in London and see much of their income disappearing in housing costs. “Oh yes you are,” said anyone who had looked at the pay distribution and wanted to indulge in this year’s most fashionable sport, having a go at “the elite”.
Of course, a lot of this depends what you mean by rich. Is it a relative term or is there a threshold for richness that means you have to at least have a mansion and a yacht?
Whether or not £70,000 a year means you are rich, there can be no argument about where it puts you in the income distribution. According to the most recent HMRC data, someone on £70k would be at around the 95th percentile, so, at least in terms of income, richer than 95 percent of the population. The HMRC data is 2 years out of date and we have had some pay growth since 2014-15 so a £70k income might not be quite so high now. Even so, it would still put you comfortably in the top 10 percent.
So should those on £70,000 pay more tax or should it just be the very rich who get stung?
Here’s where the problem starts. Limiting tax increases to those earning over £70k isn’t going to do much good. As luck would have it, HMRC published its estimates of tax revenues on the same day that John McDonnell made his comments.
Assuming an April 2018 implementation, here are the amounts a 1 percent increase would raise on various taxes.
The four big revenue raisers are income tax, corporation tax, national insurance and VAT. Of the rest, the largest yields come from stamp duty which is some way behind. The trouble is, the government can only get big numbers by taxing everybody. A 1 percent increase in the higher rate of income tax, those earning over £45,000, would bring in just over £1 billion a year while 1 percent on the basic rate would net £4.5 billion. A similar increase for the £150,000 plus band would only bring in £165 million.
OK, there might be some scope for hitting the rich indirectly through corporation tax and employer NI but there are ways of avoiding both. Significant increases in employer NI might just lead to more poorly paid self-employment.
According to the Office for Budget Responsibility, even if the government achieves its planned cuts to public services and social security, which is by no means certain, it will still be £21 billion adrift in 2019-20. Assuming the government does manage to close the deficit sometime early in the next decade, the OBR’s longer term projections see deficits opening up again from the middle of the 2020s as demographic and other pressures start to push up public spending. Since the recession, tax revenues have continued to disappoint, which is the main reason why the deficit is still with us. Even if the government stops trying to eliminate the deficit and adopts the more modest aim of covering day-to-day spending with revenue, it will need to find some more money from somewhere.
The trouble is, however attractive a tax-the-rich policy might sound, it won’t deliver enough. To deal with the upward pressure on public spending, without making yet more cuts in the next decade, the government will need more tax from all of us. At the last election, the Resolution Foundation came up with the term Candour Deficit to describe the reluctance of all main political parties to come clean with the voters about tax, borrowing and the feasibility of public spending cuts. Things don’t seem to have changed much. Even the chancellor’s hint that he might have to increase income tax, VAT or NI caused a fuss.
At some point, someone will have to tell those on middle incomes (rather than those who just think they are) that they will have to pay more tax. Will that happen at this election? Is somebody going to come clean or will we just have another 5 years of blather about eliminating the deficit with spending cuts, while our public finances and public services slowly deteriorate?