Tax and ‘the rich’

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 The HMRC data is 2 years out of date and we have had some pay growth since 2014-15 so a £70k income might not be quite so high now.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.

Chart by Michael O’Connor

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?

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17 Responses to Tax and ‘the rich’

  1. Great post. But, when you say “A 1 per cent increase in the higher rate of income tax, those earning over £32,000”, you surely mean “those earning over £43,000”, or £45,000 in 2017-18, including the tax-free allowance? The £32K figure is taxable income. Wx

  2. lorgy says:

    The issue is wealth. Increasing taxes on income means that often we hit people who don’t feel rich and who compare themselves to their parents, who own fancy houses and might have less income but they don’t have to spend 60% of it on rent.
    TBH I’m not that sympathetic to people on 70k a year claiming they aren’t rich, but if you’re in London and in your 20s or 30s then incomes that most normal people would see as more than comfortable can feel pretty tight.
    We’d raise tons of money with Land Value Taxation. Just saying.

    • Graham Bygrave says:

      Precisely. Being “rich” is about what you have not what you earn. Income of 70k (and to a lesser degree, other inner cities) after you take out the basics in London affords a pretty meagre existence. The rich are those who have a lot. Primarily housing wealth. Unearned and largely untaxed. How about repaying stamp on houses (index linked) to buyers and instead levying capital gains on house price increases to level things out between generations? I wonder how many votes that would get, given the young don’t vote. I suppose that’s why politicians wouldn’t do it. Don’t believe all this nonsense about “fairness”. It’s about politicians trying to gain and hold onto power. Fairness has got nothing to do with it.

  3. Patricia Leighton says:

    It is amazing how politicians, especially Tories continue to blather on about what a good state our economy is in.We may be good at creating jobs(Less good at getting people to fill them, other than migrants) and inward investment(Now largely caused by the dreadfully weak pound) but we have major problems few will talk about. As Rick said a couple of posts ago, productivity is very poor and declining, investment in skills and infrastructure laughable,and our essential services continue to get worse. Of course, under-funding is only one of the problems, but nonetheless, cash will have to come from somewhere.(Our EU debts will come on stream soon, as well). It is vital for a fair tax system to emerge, including rises, especially, one suspects in direct direct taxation. Probably on June 9th someone will speak about it.

  4. Nick says:

    Why are you ignoring housing wealth?
    This is where the money lie.
    How much will we make if:
    -We introduce LVT
    -Remove CGT allowances for property

  5. “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”
    How much revenue would it bring in if all income over, say, £100,000 were taxed at 90%?
    As others have pointed out here, and as Thomas Piketty described in detail in Capital in the 21st Century, taxes on wealth would bring in a great deal of revenue.

    • Dipper says:

      “taxes on wealth would bring in a great deal of revenue”.

      Without some rationale as to why that particular sum of money needs to be taken out of the pocket of the person who has it (e.g. Philip Green and the BHS pension fund), this is simply saying that taking large amounts of money from people who have large amounts of money would bring in large amounts of money.

      Having done that once, it is hard to see how you could ever do it again as anyone with any ambition to earn money would just leave the country and move their wealth where you can’t get it. It would be the end of premier-league-standard football in the UK in an instant, for example.

    • Gareth Smith says:

      But that has approximately zero chance of ever being adopted by any party seeking power in the U.K.

      • In the UK, the highest rate of income tax during WWII was 99.25%. In the 1950s it was around 90%. It’s absurd to claim that this couldn’t happen again.

        • Jim says:

          It couldn’t happen again without capital controls…………………..don’t forget you couldn’t take more a nominal sum of money out of the UK until Mrs T abolished CC in 1979. Why do you think 60s and 70s pop stars went abroad to record their albums?

          Its weird that with one hand the Left is telling us that Brexit is the UK isolating itself from the civilised world (as if the EU is the sole source of civilisation), and with the other would happily contemplate the introduction of CC that would really isolate us from the entire rest of the world.

  6. I want to submit to you my own personal definition of wealth..
    I define rich somebody who can live of capital income better than what a median salary gets you, without touching his principal and covering for inflation. So if your capital generates low-risk real returns above the median salary, you are rich.
    You are VERY rich if your capital generates a real return above the top 1% salaries.
    I am fully aware that with real returns going down, this puts the thresold for wealth higher.
    But i strongly suspect that the idea that people are wealthy if they can comfortably live without working ever again is correct.

  7. jim smith says:

    I am pretty sure that all studies show – in terms of actual income to the government – once you tax people past 50% , you actually raise less money. I don’t know of any time in history where penal taxes over this rate did anything other than destroy economies. The issue here is that successive governments have removed more and more people from the tax take – and its a hard one to reverse for any incoming government .A mandate of ” vote for us and we will tax the majority more” isnt a great vote winner. You need tax rates that do not deter private job creators from growing. Heres ths socialist bit – Governments now need to tax assets. QE has meant asset prices have risen- and who owns all the assets? ..the rich. Thus the rich have got richer and the majority have seen nothing.Rather than aspire to be rich , the gap has grown so great that the majority now merely resent the rich.

    • “I am pretty sure that all studies show – in terms of actual income to the government – once you tax people past 50% , you actually raise less money. I don’t know of any time in history where penal taxes over this rate did anything other than destroy economies. ”

      The top marginal tax rate in the US was well over 50% for most of the 20th century. In 1944 it was 94%. Yet the US economy did very well after the war. The top marginal tax rate has been less than 50% only since 1986.

  8. Anders says:

    Rick – you seem to regard closing the (current) deficit as an urgent problem. Why not just accept that we have an ongoing structural govt deficit in the UK?

    MMT tells us that the govt doesn’t need to close this, b/c the government budget constraint doesn’t apply to us, and we needn’t fear hyperinflation even if the BoE started applying yield caps.

  9. Danny A says:

    The whole debate is misdirection. Increasing tax rates just brings in unit ‘revenue’ with fewer transactions. This means less spending in the economy. Which might be what you want if you have excessive inflation, but questionable if not. And​ in this respect the deficit represents private saving. But its fallacious to imply that the Treasury can only spend what HMRC has recorded in tax. Sadly this is the misconception most people hold.

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