Debate Magazine

Economic Myths: We Are Too Reliant on Tax Paid by the Top One Percent of Taxpayers.

Posted on the 19 November 2017 by Markwadsworth @Mark_Wadsworth

From The Telegraph:
The tax burden shouldered by Britain's wealthiest has almost trebled since the 1970s, analysis of historic data reveals - further undermining the Conservative's reputation as a "low tax" party.
Daily Telegraph analysis of nearly four decades of tax and income records shows high earners are now responsible for paying a higher proportion of Britain's total income tax bill than they have done under any Labour government. Today the top 1pc of income taxpayers, who earn in excess of £162,000 a year, now pay nearly a third (27pc) of all income tax...
Lord Lamont, who served as Chancellor under the Conservative Government in the early nineties, warned higher taxes could put off wealthy foreigners from coming to the UK.
He said: "We have succeeded in attracting a lot of high-net worth individuals and that should be applauded. [But] It would be wrong to think you can always rely on someone else to pay taxes. Robbing Peter to pay Paul, Paul will always vote for that but it won't always work. I'm not a great fan of ever increasing the personal tax allowance because everyone should pay some tax."
Andrew Brigden, a Conservative MP, warned taxes on the wealthy were at the point where any further increase could threaten their productivity.
He said: Tax should never be a punishment for the wealthy. The higher you raise tax, the less money you get in. I think we have reached that point. If we put the top rate of tax back to 40pc [from 45pc] we would raise more revenue because people would be more encouraged to be productive."

There are a few important things they deliberately overlook:
1. Income tax is only about a quarter of total tax receipts; since the 1970s, income tax (and corporation tax) rates have come down and stealth taxes on earnings (National Insurance and VAT) have steadily gone up. So while the top 1% pay 27% of all income tax in the narrow sense, they pay a smaller share of total taxes (as National Insurance and VAT are regressive taxes). It's the same principle with Domestic Rates v Council Tax.
As explain, if you look at all taxes, the top ten percent of earners pay 27% of all taxes.
2. The share of income earned by the top 1% has increased enormously since the 1970s. Even in the mid-1990s, there was an outcry when the boss of the recently privatised British Gas paid himself £475,000 a year. In 2017, FTSE100 CEO's paid themselves on average ten times that, (not adjusted for inflation), and we're supposed to think this is normal.
So inevitably, the share of income tax paid by the top 1% has increased accordingly.
3. As to "driving talent abroad", what is important here is the territorial principle, a general rule in designing tax systems, that countries should only tax income which arises (or assets situated) within their own borders at source; to do otherwise means that people can save tax by relocating abroad. And if you tax your residents on income they receive from abroad, they are less likely to come here. IMHO we should be welcoming wealthy foreigners with open arms (and not taxing their remittances from abroad), not because there is anything noble about them, but because they will be spending money here - like tourists, they are good for the balance of trade.
4. Most of those high incomes are simply rent. One person on his or her own (a self employed plumber or mobile hairdresser) can't possibly earn more than £50,000 a year. To earn more than that, you need to be higher up an organisational pyramid (state or private). Those high incomes do not arise because of any special skill or ongoing hard work (people who set up their own business decades ago are reaping the benefit of hard work they did, or risks they took in the past), or because of people's personal contributions to overall wealth, they are just exploiting privileges created by the way the system is set up (long list, and as a tip-top tax adviser, I'm on it; but my employers are far higher up the list than I am).
Even if everybody earning more than £162,000 were to disappear abroad tomorrow, the size of the economy would barely change. Either others would step into their shoes (and pay the tax), or even better, inequality would be reduced and there would be less need for redistributive taxes in the first place.
5. If you draw the logical conclusion from all this, the best place to start is by scrapping all taxes on earned income (National Insurance, VAT) and increasing the personal allowance to about £50,000* and just taxing rents or rental values instead, starting with Land Value Tax on UK land and buildings.
Think about it - if somebody offered you a full-time job involving proper work paying £50,000 with a tax rate of 80%, you'd turn it down, there'd be no point. But if somebody offered to sell you their buy-to-let 'portfolio' for £1, and that 'portfolio' generates £50,000 gross income taxed at 80%, you'd happily accept it.
It's only £10,000 extra income, but well worth it for a few hours work a month.
If the choice were between a normal full-time admin job paying £50,000 a year tax free and a job as a university vice-chancellor for £250,000 a year taxed at 80%, you would be largely indifferent.
*6. An alternative proposal - which would admittedly be administratively unworkable - would be to get rid of the concept of the annual personal allowance and have an hourly personal allowance instead, call it £25/hour. So somebody who earns £50,000 for being a non-exec director, involving one board meeting a month would pay income tax on nearly all of it, but a self-employed plumber/hairdresser who does fifty hours a week would pay little or no income tax.

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