Income tax burden increasingly unequal

HMRC has today published figures on income tax liabilities, showing a number of interesting patterns, the most significant of which being income tax burden distribution – that is, how big a share of the total income tax take is paid by the top and bottom earners.

Naturally, a degree of progressivity to be expected and it is unsurprising that the top quarter of earners is projected to account for 72.9 per cent of income tax revenue, whereas the bottom 25 per cent – just 2.3 per cent. What is surprising, however, is the trend which emerges after looking at how this burden has changed over time.

From 1999-00 to 2017-18, share of income tax burden for the bottom one, five, ten and 25 per cent has so far stayed flat or shifted either way by just 0.1 per cent. If we were to divide the total pot of eligible taxpayers in half according to income, we would find that figure down by 1.7 per cent for the bottom half, and up by the same amount for the top.

So far, so steady, but the story changes dramatically once we get to the top percentiles. Over that same time period, the share attributable to the top quarter of population by income has jumped by 5.4 percentage points, whilst for the top five and ten per cent – by a staggering 8.2 and 7.5 percentage points. It is only when we get to the top one per cent the share drops to 5.6, a figure still significantly higher than the rates of change we have seen in the bottom percentiles.

(Source: HM Revenue & Customs, UK Income Tax Liabilities Statistics, TPA own calculations)

This trend possesses both economic and ethical dimensions. Turning first to the economic, we may say that the figures show nothing new, merely that the principle of progressivity in taxation – that it is right to ask those with the broadest shoulders to contribute more – has become more pronounced over time, and that is a good thing.

But relying on an increasingly small pool of eligible taxpayers for revenue is risky. That group of people tends to be most mobile and have volatile incomes from a range of sources, notably capital gains, dividends and rental income, not all of which will be captured by income tax. They also tend to be most responsive to changes in the tax system, because they have most to lose and are able to sophisticatedly structure their tax affairs. All of this means that receipts for a given year will be a lot harder to forecast accurately, which makes long-term policy planning difficult.

As to the ethical dimension, the principle of progressivity in and of itself is silent on the volume of discrepancy that can exist between the top and bottom – is it fair that the richest part of society contributes 30 per cent of total revenue? Is it 40? 50? There must surely be a limit to the extent we can burden the top before it becomes unfair.