Sunday, 19 November 2017

Economic Myths: We are too reliant on tax paid by the top one percent of taxpayers.

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, and they probably receive about 27% of all income. The progressive taxes and regressive taxes seem to average out, and ultimately, the UK tax system is surprisingly flat. It's the same with Council Tax (regressive) and SDLT, IHT and ATED (progressive) - if annualised and expressed as a percentage of the value of the underlying land and buildings, the total tax bill is pretty flat as a percentage.

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. That'll be mainly the rental value of land, but until and unless we can actually split these high salaries into 'earned' and 'rent', we'll just have to draw a line somewhere, like at £50,000 a year.

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; it only needs one person in hundreds of thousands to accept the vice-chancellor job. That's clearly a UK based job, so no danger of all vice-chancellors skipping off to a tax haven.

*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.


Ben Jamin' said...

I looked into this myself a couple of years ago. The top 1% take around 15% of total incomes and pay around 18% of total taxes.

So yeah, mildly progressive, but not exactly socialism gone mad.

Ben Jamin' said...

BTW, the top 1% own around 40% of all land by value, so its highly understandable they prefer to pay eye catching taxes on income rather than a fair and optimally efficient LVT.

Which is what this whole thing is about, and frustratingly an open goal to the Labour party if they were not such a bunch of envy ridden control freaks. Socialism is without doubt the top 1%'s dream come true. A truly horrific symbiotic relationship.

Mark Wadsworth said...

BJ, exactly. It's difficult to come up with precise percentages, but any closer inspection suggests is close to flat across income groups.

Your second point was amply illustrated by Macron's recent late realisation that he can get more tax overall by exempting everything except land and buildings from the French 'wealth tax' i.e. making it into crude LVT. The Homeys and Socialists were up in arms about it, and I believe the plan was shelved.

Mark Wadsworth said...

BJ, and to be fair, while the top 1% own 40% of all land by value, they also pay about 40% of all taxes related to land and buildings (council tax, IHT, SDLT, ATED, CGT, income tax on rent) - but that is still 40% of not very much in tax (maybe 10% of all tax revenues).

Maybe that explains the difference between 15% of incomes and 18% of total tax - the extra 3% is their modest repayment of land-related benefits?

James Higham said...

increasing the personal allowance to about £50,000

A nice figure.

Mark Wadsworth said...

JH, ta. It's a bit arbitrary, but that just means that only the top ten per cent of earners pay income tax on the excess over £50,000 (the earned bit).

L fairfax said...

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."
Very true, it is not like shareholders or anyone else have benefit enormously from their increased performance, so why do they get paid more?
(The only thing I agree with Corbyn about).

Lola said...

This CEO's pay meme. I suspect that their is a quite a spread and that at the top there are those able to command 'rents' - banks CEO's day and those that can't - CEO of a manufacturer say. Mind you where does 'rent' stop? RR is not so much a tip top engineering company as a service provider of power plant solutions for airlines. They actually do 'rent' out their engines.

Mark Wadsworth said...

L, it's a very grey area, I admit. Manufacturing income is not inherently rent.