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Thursday, 22 March 2012

There's one for you, nineteen for me

In some quarters, it has become an article of faith that to cut the 50p top rate of tax is an act of betrayal, a callous and partisan decision by a ‘posh-boy’ government inclined to favour the filthy rich at the expense of the hoi polloi. That might be a convenient peg on which to hang your donkey jacket while you’re signing up for the ‘Class Warfare’ module at your local college, but knee-jerk responses and party slogans are inadequate to the task of appreciating the nuanced realities of our tax system.

Back in 1970, the top 1% earners in the UK contributed around 11% to the total tax yield. That was after several years in which the government imposed ‘super-tax’ rates which peaked at 83% (and which, for some, reached an unbelievable 98% once a surcharge on investments and dividends had been levied). Super-tax rates, in class warfare terms, might have scored a few brownie points; in terms of income generation, they sucked.

UK governments since then have -by and large- accepted the idea that punitive tax rates for the very rich are not beneficial to the overall yield. Today, the inconvenient truth for those who like to complain about the rich ‘getting away with it’, is that the top 1% of earners in the UK are accountable for 28% of the total income tax yield, while the top 15% of earners are responsible for 63%. In just over forty years, the income tax yield from that top 1% has increased by more than 150%.

The argument for cutting the 50p top rate is that it actually generates more money from the top earners. Evidence suggests that people who earn huge sums of money are far less likely to seek legal methods of tax avoidance if their top rate is lower than, or somewhere around, 40p in the pound. Once it hits 50p, there is a perception that it becomes ‘unfair’ and folk are then encouraged to look for ways around it. If, therefore, you want to get more money out of very rich people, you have to make your top rate just high enough to generate the desired tax yield, but just low enough for them to think they are being treated fairly. Not only (the theory goes) do you get more tax out of them; you encourage them to spend more money on goods and services, which will have been provided by small, medium and large businesses (employing small, medium and large people).
Some folk might not like the idea pandering to such a mentality, but those misgivings should be irrelevant if -and this might be a big if- the primary focus really is on increasing the tax yield to the exchequer.

Last year, Adele took a huge amount of public flak because she had the nerve to complain about her £4m tax bill. That’s four million pounds in one year. A four million pound contribution to roads, schools, hospitals, MPs expenses and all the rest, paid into the system by our most successful singer. On a quick, back-of-a-fag-packet calculation, I reckon I’ll need to live and work until the age of 389 to have contributed that amount to the public coffers.

It’s not difficult to see how and why the tax yield from that top 1% has increased so markedly within a few decades. We’ve developed a system that induces the top 15% of earners to contribute 63% of our total income tax yield; most folk, I think, would be comfortable with labelling that system as ‘progressive’.
Those who claim that the current government is merely currying favour with our top earners should perhaps ask themselves whether they want to bleed the rich for the sake of it (which is one thing), or whether they want to generate more funds for the exchequer (which is quite another).

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