Memo to both Left and Right: Income Tax isn’t the only tax that matters

There was some leftie love showered on this ConservativeHome article by Peter Franklin this week: Right-wingers should stop boasting about how much income tax the rich pay. His point was absolutely right, as he laid into the supposedly slam-dunk argument glibly tossed around by unthinking capitalist Tories like Boris:

The richest one per cent of Britons contribute 30 per cent of all the Income Tax collected in this country. This, supposedly, is a ‘killer fact’ – deployed with devastating complacency by the free-market right: Rising inequality? No need to worry about that! The rich are kindly paying your taxes for you – so just you run along.

But as Peter observed:

Income Tax is only one tax among many. Indeed, it isn’t even the only tax on income; once National Insurance is factored in, the system isn’t nearly so progressive. Add in all the taxes and duties and things become yet flatter.

Yep – ‘Income Tax is only one tax among many’. But it’s amazing how quickly the left forget that when it suits them.

Many, for example, still attack the Lib Dems for being part of a Coalition government that cut the top-rate of tax from 50p to 45p for those earning more than £150k. Yet they ignore the fact that, in the same 2012 budget, wealth taxes were increased: stamp duty was increased to 7% for multi-million pound homes, and there was a new 15% tax on companies buying property over £2m.

The net result of the Coalition’s tax and benefit changes has seen the income of the richest 10% fall most sharply since 2010, as this IFS graph shows:

ifs_distribution graph

And rightly so. As Nick Clegg has said, “those with the broadest shoulders must bear the greatest burden”.

So if the left is now accepting that Income Tax is just one tax among many, can they also stop obsessing that the only tax which matters if you want to be progressive is the top-rate of Income Tax?

* Stephen was Editor (and Co-Editor) of Liberal Democrat Voice from 2007 to 2015, and writes at The Collected Stephen Tall.

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27 Comments

  • Matthew Doye 13th Feb '14 - 8:01am

    Yes, as the graph shows the richest 10% are bearing the broadest burden, however that those shoulldering thye next heaviest loads are in the poorest deciles is simply not good enough, we must do better.

  • Eddie Sammon 13th Feb '14 - 8:30am

    We need to do what the Spectator does and start calling it the 52% and the 47% rate. We should add NI to all tax rates.

  • Eddie Sammon 13th Feb '14 - 8:36am

    But yes, all taxes need to be considered. For this we need a much simpler system (if possible).

  • Stephen FairweatherTall says — “So if the left is now accepting that Income Tax is just one tax among many, can they also stop obsessing that the only tax which matters if you want to be progressive is the top-rate of Income Tax?”

    Who has been obsessing about income tax? It really depends who Stephen means when he uses the name “the left”. A lot of Liberal Democrats regard themselves as “the left”. They have been calling for a wealth tax, a traditional “left” approach.

    From Jo Grimond through to Ming Campbell our leaders have been happy to style themselves as “left” or “centre-left”. All of those Liberal and Liberal Democrat leaders along with the bulk of the members and supporters were happy with that description. Being on the left does not automatically mean that people have been obsessing with a particular tax.

    Do I assume that Stephen Tall now thinks of himself as being on”the right” since he left the Labour Party to join the Liberal Democrats ? There can be a lot in a name, be it “right”, “left” or “FairweatherTall”.

  • Stuart Mitchell 13th Feb '14 - 9:58am

    “Memo to both Left and Right: Income Tax isn’t the only tax that matters”

    That’s a bit rich considering it’s those in the centre (i.e. the Lib Dems) who muddy the waters the most on tax these days, with their constant boasts of a “£700 tax cut for every worker” (a claim that is wrong on several levels).

    “As Nick Clegg has said, ‘those with the broadest shoulders must bear the greatest burden’.”

    Stephen, you don’t seem to have noticed that your graph shows those in the poorest decile bearing the second greatest burden, with those in the 9th decile bearing the least burden!

    As for those in the top decile who are supposedly paying more tax, they can at least console themselves that they have a lot more left over after they’ve paid the tax, thanks to the huge pay rises they get compared to the rest of us :-

    http://www.bbc.co.uk/news/business-24983178

    So it’s not really much of a burden at all, is it?

  • @Caracatus

    “What I woud l like to know is what percentage of their income the rich are contributing in income tax. I will eat my hat if it is anything like 45%. That is why the debate about the 50p top rate of tax is so odd.”

    This is a really good point and a stat I’d like to see. If you throw in pension tax relief, the lower capital gains tax rate etc etc I wonder what percentage of their total earnings in a year is being paid in tax by the richest?

    It would be interesting if there was a LibLab coalition next election what the agreed tax policy would be…

  • Jedibeeftrix – if you replaced “Stay away from penalising our property owning democracy” (what did you have in mind?) with “switch a proportion of taxation from income to wealth” to your list I would agree with it 100%.

  • Eddie Sammon 13th Feb '14 - 11:17am

    Gareth, the IFS defend the lower CGT rate on shares because they already pay corporation tax. The problem is tax reliefs are introduced with the lobbyist’s favourite line “they will pay for themselves”. Was it also not true that you wanted tax reliefs for the computer games industry? These honest tax reliefs are the major source of tax avoidance. Not many people bother with the grey areas of tax law (although sometimes it isn’t really grey, more like pale white :).

    The issue with pensions tax relief for higher earners is because why should a higher earner pay basic rate tax on the way into a pension and then higher rate tax on the way out? It can lead to double taxation.

    The big tax relief that needs abandoning is capital allowances, but unfortunately this is one where the government is convinced pays for itself. The truth is that it gets the short-term GDP figures up, I think.

    Regards

  • “Yet they ignore the fact that, in the same 2012 budget, wealth taxes were increased: stamp duty was increased to 7% for multi-million pound homes, and there was a new 15% tax on companies buying property over £2m.”

    And you miss the fact that within days of the 2012 budget law firms were offering a plethora of schemes to avoid paying stamp duty. I imagine aggressive tax planning would enable companies to avoid or mitigate the new 15% tax as well. The thing about income tax is that it is difficult to avoid if you an employee. It is really quite unlikely that the result of the 2012 budget was to increase the amount of tax paid by the wealthy.

  • Caracatus – “What % of income do the richest 1% have ?”

    Exactly so. I would go further and ask what percentage of disposable income they have after allowing for basic subsistence – housing, food, heat and clothing. I suspect that would really highlight the inequality.

    Also we should not forget that the tax code is liberally sprinkled with deliberate loopholes so that the 1% don’t in fact pay anything like the headline rate.

  • Eddie Sammon 13th Feb '14 - 4:42pm

    Caracatus that final figure of 29% includes deductions for the NHS, schools and more. I don’t think it is fair to tax people say 70% because after all benefits it is only 50%.

    I don’t know what to do about the super rich, but we need to not assume that if someone earns £100,000 one year (for instance a professional boxer) that they are rich. They can still be struggling financially with debts and a limited career span. It’s why I favour a net-asset tax, but this has its disadvantages too.

  • Mason Cartwright 13th Feb '14 - 5:11pm

    And rightly so. As Nick Clegg has said, “those with the broadest shoulders must bear the greatest burden”.

    Is that what this article demonstrates?

    I guess it depends on your definition of “greatest burden”

    Take £100 off a wealthy person the take £20 from a person who can’t afford to put the heating on.

    Technically you have taxed the wealthy more and the initial statement is correct.

    Read between the lines however and it’s not that simple.

  • Paul Benjamin 14th Feb '14 - 12:58am

    One of the most positive outcomes of the Coalition has in my mind been the rebalancing of taxes away from ‘earned’ income and towards ‘unearned’ income. Surely this is a progressive and even ‘lefty’ measure Labour can appreciate?

  • Mason Cartwright 14th Feb '14 - 9:18am

    ” the rebalancing of taxes away from ‘earned’ income and towards ‘unearned’ income.”

    I’m not sure I understand what you mean Paul can you elaborate a bit more?

    Thanks,Mason

  • Eddie Sammon 14th Feb '14 - 9:38am

    Please, can we not use the phrase “unearned income”? Talk about taxing the richest by all means, but interest is earned!

  • I think the term “earned income” is a very clear, well defined and understood for tax purposes as well as others. Unearned income is the rest and bank interest clearly falls within that category. I don’t think that it would really help debate to choose to abandon the term despite Eddie’s protestations.

  • Mason Cartwright 15th Feb '14 - 12:08am

    “Is it ‘fair’ for the state to take over 50% of what someone has earned”
    No and no one does nor is it necessary to redress the balance. I don’t therefore get the point.

    “How much burden can one place on broad shoulders ?”
    Well in the UK very little it seems courtesy of the new improved LIb Dems and their NBF’s.

    “Liberalism should have equal respect for those whose efforts have succeeded as well as for low income groups.”
    So does low income equate to lack of success in your eyes?

  • Mason Cartwright 15th Feb '14 - 9:31am

    The following:

    “At higher incomes, someone who earns £100K will find that if they undertake a further project, they will lose their personal tax allowance and so pay over 50% of their earnings from the project in tax.”

    looks a little different from this:

    “Is it ‘fair’ for the state to take over 50% of what someone has earned”

    Are you saying that someone earning £102k is currently paying £51k in tax in a financial year? I know several people on this level and none of them are paying this level of tax.
    Are you also asserting that most people believe that situation would be desirable and necessary to address inequality?

    “How much burden can one place on broad shoulders ?
    I go back to my original post where I challenged the graph in the article and the use of the word “burden”. What do you mean by burden because this is fundamental?

    I’m glad we have agreed to drop the word “success”. Some people actually make a conscious choice to enter professions despite their economic limitations. They do this to serve a higher purpose and quite frankly we would all be poorer if they did not.

  • The sad thing is that there is quite a slice of British people who feel that taxation is not good. They really do not believe in a more equal society through taxation. They have not read, and certainly not been convinced, by Wilkisnon and Pickett in their seminal work which demonstartes that a less unequal society is likely to be more at ease with itself.

    Some of the same people resist multiculturalism, not realising that the great diversity among us, while challenging, is enriching, not just in cultural but also in economic terms.

    I refer everyone to the preamble in our party’s constitution which was printed on membership cards. Did I hear that the cards are to be resurrected? Good.

  • Mason Cartwright 16th Feb '14 - 8:02am

    It’s called greed Paul and it’s been in fashion in the UK for quite some time now.

    What has always struck me is the difference (I have found in general) between people who came from poverty (I mean real poverty – homelessness, broken family/violence, going hungry etc)and managed against all the odds to become wealthy/comfortable; and those who came from wealth/comfort and rather predictably ended up wealthy/comfortable.

    The former group (in general) tend to be more willing to help others than the latter viewing it as a social imperative.

    When I was young I always imagined it would be the other way around.

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