Over on the IEA blog, Mark Littlewood recently repeated a very commonly made point by those of a more low tax persuasion:
It’s worth noting that the relatively affluent in Britain pay a very high proportion of the overall tax take. In terms of income tax, the highest earning 1% contribute nearly a quarter of all receipts and the top 10% account for well over half.
There’s no prizes for guessing what conclusion Mark drew from this, but turn the point on its head and it serves just as well for the opposite political perspective.
It’s worth noting that the very affluent in Britain receive a very high proportion of overall income. In terms of income tax, the highest earning 1% earn so much compared to the other 99% that the 99% only pay in total three times more income tax than the 1% despite outnumbering them by 99 times.
Depending on how you look at Mark’s figures they either show how much tax the top 1% and 10% pay or how rich they are compared to everyone else. The huge imbalance is also reflected in the large sums being brought in by relatively modest changes to pension tax breaks, limiting (for example) the amount you can put into a pension and still get tax breaks to £50,000 per year. (That’s putting £50,000 a year into a pension; not earning £50,000 a year.) Changes that will affect only around 100,000 people are set to bring in an extra £4 billion in tax.
How much you can tax without damaging the generation of wealth has long been a subject of political debate, and with the huge deficit it’s unlikely to stop any time soon.
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21 Comments
It’s good that those with plenty of money contribute a great deal – they have the most to lose is society breaks down.
Mark Littlewood’s point is invalid. The very top percentage of the affluent aren’t included in his comparisons. He’s only focussing on income tax. Many of them are non-doms, and so don’t feature – and he ignores the fact many of the richest accumulate wealth through capital gains.
2 comments
1. The fact that the top 10% of income tax earners have enough income to pay for 50% of the income tax take shows just how grossly unequal a society we are. The figures are, to me, a reason why we need to make the tax system even more progressive.
2. Without knowing what proportion of the total earned income the top 1% or 10% earn, it is pointless telling us how much they contribute in tax. If, for example, the top 10% earn 70% of the nation’s income tax take, then paying only 50% of the total tax take tells us that they are avoiding their fair share by some 20%.
Honestly, the day Mark Littlewood became associated with the LibDems was a vey unfortunate one. He was in reality an extremely right-wing person who simply happened to agree with our posiiton on ID cards.
Dominic’s second point hits the nail on the head: such statistics are pretty meaningless if they aren’t put side by side with income distribution statistics!
As for non-doms, perhaps the Coalition should be looking at replacing council tax with a local land value tax as part of the localism agenda. This would cut the taxes paid by tenants and would mean that large and valuable houses and mansions would be taxed. I don’t know what the Tories would think about it but it is certainly a sensible idea (nothing is more absurd than a tax on occupying a house!) and, unlike a local income tax, it would be economically efficient as well as fair.
It’s important to have people like Mark challenging our thinking – it makes my thinking more precise about why he’s wrong.
What annoys me is how the media uses him in the same way it uses other people formerly in top jobs in the Lib Dems as touchstones for Lib Dem thinking. Wheras I have no problem with people like Olly Grender speaking about the Lib Dems, Mark is far from a representative of the party – witness him talking about the inevitability of an electoral pact with the Tories at Conference.
@Richard SM. The income tax numbers are only a “for instance”. The 40% tax rate means of course that – all things being equal – the more you earn, the higehr a proportion of your earnings are goign to be colelcted in income tax. Although I don’t have the statistics to hand, I feel confident that, say, inheritance tax will also fall largely on the affluent (the threshold ensures that smaller estates aren’t taxed at all). The same must surely go for capital gains tax too.
@Dominic. The issue isn’t only about proportionality (in any event, a progressive tax structure supports disportional burdens). It may be a part of it, but it’s also necessary to consider, for example, revenue maximisation. The rich are mobile. Higher and higher taxes can lead to declining revenues. A hypothetical society in which the richest 10% earn 70% of the income and therefore pay 70% of the income tax isn’t likely to last for long. At rates that high, the high earners will relocate (or retire earlier or reduce their earnings and increase their leisure time). Incidentally, I agree with the LibDems on more than ID cards!
An additional consideration, which I think is often missing in the LibDem definition of “fairness” is on the distribution of benefits. Let’s imagine that a hedge fund manager earning say £2m a year pays 30% in tax, but a cleaning lady earning £10,000 pa pays 31%. Such a scenario may lead a lot of LibDems to shout “unfair” (notwithstanding that in absolute terms the hedge fund manager is paying £600,000 to the state and the cleaning lady is paying £620). But the overall picture needs to factor in benefits which may accrue to the cleaning lady but not the hedge fund manager (for example, the hedge fund manager may have private health care and send his kids to private school, whereas the cleaning lady may receive a wide range of direct state benefits and make much more use of the NHS and state schooling). Even if one is ideologically committed to a progressive (or merely proportional) redistribution approach, benefits as well as tax should surely be considered.
One of my criticisms of the IFS narrative is that it applies the progressive principle to each and every policy in isolation. Similarly, it seems to me that there are issues about the taxation system conceivably being too progressive. If the top 10% account for 40% of all income, but contribute 99% of all tax, this would be progressive. But is it fair?
@Dominic
Hang on, if it’s demonstrates how bad the system is that the top 10% of earners pay 50% of tax and you then propose increasing that from 50% upwards? Or are you saying that the top 10% should pay less tax?
Surely it is more important to aim for better wealth distribution so that the tax burden is better spread. I’m not sure that increasing taxation per-se is the best way to achieve this (or at least, not income taxation – it doesn’t change the fact that they earn more and also as Mark points out the rich are mobile enough that they can leave (and be warmly welcomed elsewhere) and thus you lose the tax base. Equally they shouldn’t get a ridiculous free ride. A careful balancing act).
Personally I think this is where education should be prioritised.
The LDV article here seems to miss the main point of the IEA post, and Clegg’s original comments on the IFS that provoked it, analysed by LV here:
http://www.liberal-vision.org/2010/10/22/clegg-attacks-the-ifs-but-what-is-fair/
that equating fairness only with outcomes that are progressive, immediately and in every instance of policy, is clearly, as Clegg put it, “nonsense”. He might have added crude socialism to that analysis. Something this party has consistently opposed.
Incidentally, NonDoms do pay income tax on all income earned in the UK, and indeed also pay capital gains. Why should the UK government be entitled to monies earned (and taxed) in foreign countries, when NonDoms also contribute to the government coffers through VAT, which they would not if they moved elsewhere.
There are only so many times you can get away with taxing a highly mobile population.
I am always amused when a discussion such as this descends into slagging off Mark Littlewood (witness Dominic Curran). I was once told by a blogger that if he wanted to raise the hits to his blog he would put Mr Littlewood’s name in the article title – that would get them flocking to the site. And I thought this party had grown up in the last six months. Ha.
The truth of the matter is that the Lib Dem mantra of “Fairness” has gone on so long now, people have forgotten, if they ever knew, what they actually meant. Nick seems to have grasped this very point given his recent comments.
Depending on how you look at Mark’s figures they either show how much tax the top 1% and 10% pay or how rich they are compared to everyone else.
It’s a good job they are so rich, or the public services would really be in trouble…
I loved how Mark Littlewood attacked the IFS’s review but clearly hadn’t read it, as he declared it said something (equating progressiveness with fairness) that the IFS acting head Carl Emerson explicitly said they didn’t do.
Has Mark Littlewood ever actually run a business as oposed to be employed by someone else ?
The very fact a hedge fund manager, who does little of use to anyone is paid £2 million is cause for concern.
but, they will be well placed to avoid tax unlike most people.
Mr Littlewood is keen on the idea that if you don’t like the way a premier league football club is run, you don’t buy a season ticket, and this will influence the behaviour of the owner. If one looks at how some of the people involved in running premier league football clubs a) aquired their money and b) spend it on football clubs with no regard to Mr Littlewood’s business model, you will see what nonsense he spouts.
@Mouse: “a hedge fund manager, who does little of use to anyone…” apart from his investors. That is, presumably, why they invest. This ‘City people provide nothing of value’ narrative is more worthy of the Communist Party than a liberal one.
Mark Pack’s original article is, I’m afraid, presenting a truism as an insight. That “that the very affluent in Britain receive a very high proportion of overall income” is almost a tautology (there is some disparity between wealth and income, though we all too often ignore that when discussing poverty, where we focus too much on Gini coefficents and the like when the lowest income deciles tend to be those who are temporarily on low incomes but have perfectly good prospects for the future – students; those setting up their own businesses; those living off sizable assets; etc.).
I disagree with Mark’s analysis that what “is often missing in the LibDem definition of “fairness” is on the distribution of benefits”, however. That’s just detail. What is too-often missing from the Lib Dem’s definition of “fairness” is any sense that what is “fair” can be defined by entitlement rather than distribution; that “fairness” has less to do with what one has a right to and more to do with an artificial assumption about and ideal end-state. Why is a society that uses any means necessary to achieve equality of wealth (a gini coefficient of 0) “fairer” than one that uses any means necessary to uphold Article 17 of the Universal Declaration of Human Rights?
Couple of typos there. Note to self. Don’t post at 1 am!
One thing that Mark Littlewood’s veiw doesn’t account for is that the logarithmic nature of income distribution is unfair eg. someon earning a million pounds couldn’t possibly have worked a thousand times harder than somone on minimum wage; taxation should idealy be used to mitigate such unfairness.
The endgame that Mark Littlewood demands should be the point at which the above problem is thought to have been reasonably well resolved, the point at wich revenue is maximised or the point at wich any further tax increase on the rich will damage the economy enough to hurt the poorest in spite of anything the government could do with the increased revenue from the rich, whichever comes first.
The neglected point here – and in most such debates – is that income tax isn’t actually paid by the earner at all, but passed on in the costs of goods and services paid by the end consumer, with a deadweight and ultimately regressive effect on the economy. Depressing in every sense.
Mark (little wood) point is a good one .the better off are already contributing enormously to psying for all the things lib dems want the state to do.
But we should also be looking lower down where families on modest incomes are paying over large amounts of tax.
Only answer is a smzller state, doing less, giving people more choice about whist they do with their own money.
@Mouse. I don’t know when I’ve said that if you don’t buy a season ticket, a Premier League club is bound to take notice of your concern. I run the IEA as it’s chief executive, turnover c£1m and a dozen staff. Was previously self-employed as a director of Progressive Vision. Not sure if this counts in your mind, or how it compares to your business experience.
@Matt. I have read the IFS report and as you will see if you read my article, my view is the progressive = fair trap is not wholly of their making, although they did walk straight into it.
@David LG. Are you seriously saying that remuneration should be based on how hard working you are? That’s clearly mad for all sorts of reasons. How would you compare Wayne Rooney’s work rate to that of a nurse? And what would you do about their wage packets?
@Mark Littlewood. If what somone says is mad prehaps its because you haven’t understood what they meant; I said that unfairness should be mitigated through tax, not removed completely by deciding what people or proffessions deserve on an individual basis because as you say, that would be impossible. Idealy it should be very rare for people to be many times better off (including the effects of state beniffits and services) than the (fully employed) poor.
As I say there may come a point where the consequences of further tax rises on the rich are against everyones interest, but what I am saying is that the tax system should be as fair as is practicable and it is highly unlikley for such an approach to result in someone being significantly less well off than they deserve as a result of their tax bill.
Before I make my intellectual analysis of the topic, I have to say that IMHO the work done by 99.99999% of nurses is worth more than that done by Wayne Rooney – not that I’m anti-sport – I once won a BMAF medal (largely because a guy one day younger than me refuses to compete as a “veteran”).
The IFS analysis is flawed because they accept the New Labour categories as defining poverty whereas all the genuine measures of poverty score higher in the second decile than the bottom decile that spends more than its total income (on New Labour’s definition of income) on VAT-rated items (i.e.excluding food, rent, public transport and children’s clothes). Think about that.
The faults include the EFS survey excluding redundancy pay and understating tax credits by one-third – i.e. tax credits were 50% higher than those stated overall – so for the lowest three deciles a significant %age of income was ignored and the impact of the cuts was massively overstated.
I do believe in “Fairness”, occasionally at my own expense (but what can I do, except appear churlish, if Chris refuses to admit that he is over 40?)
How the government treats pensions has always been a political decision since pensions were invented – they were, after all, invented as a way to raise cash for the government of the day
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