Britain's income taxes leaned relatively heavily on the rich before the 50p rate

March 22, 2011 10:17 AM

An interesting article by the Tax Foundation yesterday looked at how heavily different countries lean on those with higher incomes.  It cited OECD data from the mid-2000s (i.e. before the 50p rate) looking at the share of taxes coming from the richest decile (the richest ten per cent of the population).  That showed that the US took the most, at 45.1 per cent of all income taxes, and the UK was pretty high at 38.6 per cent.  However that could partly be explained by greater income inequality in the US in particular: rich people have a greater share of total income so they pay a greater share of total income taxes.  To correct for that they look at the ratio between the richest decile's share of income taxes and their share of market income.  Again the US topped the table with the highest ratio at 1.35.  The UK also leaned relatively heavily on the rich though.

[caption id="attachment_26709" align="alignnone" width="452" caption="Ratio of share of taxes of richest decile to share of market income of richest decile, by country, mid-2000s"][/caption]

Of course, that graph is far from a complete picture.  There are consumption taxes too and they hit the poorest hardest.  It does show though that a steady pursuit of relatively low top marginal rates of income had yielded quite strong results in terms of getting the rich to pay a substantial share by the mid-2000s.  There is a real danger we are throwing that away at the moment.

Now we have the 50p rate which most independent forecasters expect is not raising any revenue.  That will mean the rest of us have to pay more.  New gestures are apparently being lined up as well like a private jet tax.  If that just amounts to adding air passenger duty to flights on private jets then it will probably be pretty irrelevant.  If it is more punitive, it will be yet another strike against the idea that Britain welcomes people who bring money and jobs to the country.  It will be another straw that breaks more camels' backs and sends some limping off to Switzerland.

If we want to reduce the burden on ordinary families we need to stop trying to mislead them with those sorts of gestures.  Instead there are two critical steps.  First, stop the rapid growth in some items of spending - like International Development and the capital budget of the Department of Energy and Climate Change - and use the money to start lowering taxes. Scrap HS2 as an intolerable white elephant while resources are so scarce.  Go for more affordable options to get the capacity we need.  Then cut back on attempts to use the tax system to police behaviour.  Higher and higher taxes on smoking and drinking might satisfy nanny state enthusiasts but they hit the poor hardest.  That means they directly increase benefit dependency or poverty.

The biggest determinant of the fortunes of poor and middle income families will be the extent of economic growth, not how the resulting prosperity is carved up, so we need to do all we can to create the right conditions.  But to the extent those families are paying a larger share than they need to be, they are paying for political class shibboleths like sharp rises in international development spending and nannying taxes.  It isn't because the rich aren't paying their share.An interesting article by the Tax Foundation yesterday looked at how heavily different countries lean on those with higher incomes.  It cited OECD data from the mid-2000s (i.e. before the 50p rate) looking at the share of taxes coming from the richest decile (the richest ten per cent of the population).  That showed that the US took the most, at 45.1 per cent of all income taxes, and the UK was pretty high at 38.6 per cent.  However that could partly be explained by greater income inequality in the US in particular: rich people have a greater share of total income so they pay a greater share of total income taxes.  To correct for that they look at the ratio between the richest decile's share of income taxes and their share of market income.  Again the US topped the table with the highest ratio at 1.35.  The UK also leaned relatively heavily on the rich though.

[caption id="attachment_26709" align="alignnone" width="452" caption="Ratio of share of taxes of richest decile to share of market income of richest decile, by country, mid-2000s"][/caption]

Of course, that graph is far from a complete picture.  There are consumption taxes too and they hit the poorest hardest.  It does show though that a steady pursuit of relatively low top marginal rates of income had yielded quite strong results in terms of getting the rich to pay a substantial share by the mid-2000s.  There is a real danger we are throwing that away at the moment.

Now we have the 50p rate which most independent forecasters expect is not raising any revenue.  That will mean the rest of us have to pay more.  New gestures are apparently being lined up as well like a private jet tax.  If that just amounts to adding air passenger duty to flights on private jets then it will probably be pretty irrelevant.  If it is more punitive, it will be yet another strike against the idea that Britain welcomes people who bring money and jobs to the country.  It will be another straw that breaks more camels' backs and sends some limping off to Switzerland.

If we want to reduce the burden on ordinary families we need to stop trying to mislead them with those sorts of gestures.  Instead there are two critical steps.  First, stop the rapid growth in some items of spending - like International Development and the capital budget of the Department of Energy and Climate Change - and use the money to start lowering taxes. Scrap HS2 as an intolerable white elephant while resources are so scarce.  Go for more affordable options to get the capacity we need.  Then cut back on attempts to use the tax system to police behaviour.  Higher and higher taxes on smoking and drinking might satisfy nanny state enthusiasts but they hit the poor hardest.  That means they directly increase benefit dependency or poverty.

The biggest determinant of the fortunes of poor and middle income families will be the extent of economic growth, not how the resulting prosperity is carved up, so we need to do all we can to create the right conditions.  But to the extent those families are paying a larger share than they need to be, they are paying for political class shibboleths like sharp rises in international development spending and nannying taxes.  It isn't because the rich aren't paying their share.

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