One nation under one tax: But it’s not the rich who should pay more, it’s the poor who should pay less

14th September 2011

So what is the fairest way to tax people? It's an age-old argument that started in Biblical times.

When it comes to paying one of life's inevitables (along with death) it seems that when it comes to taxation or implementation, you can't please all of the people all of the time.

Earlier this month (September) a group of economists wrote to the Financial Times (paywall) urging the government to drop the 50p tax rate. They claimed scrapping a tax levied at those with an income tax of £150,000 and above was necessary to stimulate UK economic growth.

Their argument for ditching it was that "the tax applies to just one per cent of taxpayers, who already pay 24% of all income taxes."

The coalition government subsequently rejected the calls, saying it was needed to cut the tax burden to middle and low income earners.

At the same time billionaires in France and the US have been asking that they be taxed more.

Warren Buffett was among the US billionaires to lead the call, arguing it was unfair that his tax rate was in fact lower than many of those who worked for him.

Meanwhile in France as a "a gesture of national solidarity" Christophe de Margerie, head of oil major Total and a member of the wealthy Taittinger family, and Maurice Lévy, head of Publicis, were among 16 executives and wealthy investors to have signed a petition urging their government to tax them more.

The nearest the UK got to a 'Tax me more too please' movement was Sir Stuart Rose's insistence the 50p tax rate be retained.

As reported in the Guardian the former chairman of Marks and Spencer also said he would be willing to pay more tax to help bail out Britain's finances.

"I don't think that they should reduce the income tax rate. How would I explain to my secretary that I am getting less tax on my income, which is palpably bigger than hers, when hers is not going down?"

"If, in the short term, a case was made for me to pay more than 50% tax, which would help UK plc, I personally – Stuart Rose – would be prepared to pay more tax."

But is taxing the rich more the solution? Shaun Richards, Mindful Money economist blogger, believes it's not about taxing the rich more, but making sure the poorest pay less.

His argument, have long been echoed by many low income pressure groups such as The Child Poverty Action Group.

Richards argues that the benefits system means that the UK's poorest end up paying 90% income tax.

"Some of our poorest individuals in the UK find themselves in a situation where if they earn an extra pound they not only find themselves having to pay income tax and national insurance contributions on it but they also find themselves losing entitlements to wait for it some combination of Housing Benefit, Council Tax Benefit, Child Tax Credit and – for people moving into work – Working Tax Credit.

"I do not believe that I have named them all as I am not a social security expert but I think you get the idea."

Richards also quotes the government's own data which shows that most of us are paying more than 20% or 40% [high rate] tax on our earnings.

According to numbers estimated by the DWP [Department for Work and Pensions] these are the rates at play in 2011/12, some 130,000 people pay over 90%, 330,000 pay over 80%, 1,710,000 pay over 70% and 1,935,000 pay over 60%.

"These rates," he writes " make the removal of the 50% income tax rate "not quite so important" adding "we should be ashamed of the situation which we have allowed to build up here."

Richards' solution is to combine National Insurance and income taxes, which would not just save money [via savings in collection] but simplify the system.

"In my opinion the debate over high tax rates has concentrated in the wrong area. Logically you should start with the highest tax rates and then work downwards which would be my suggestion. It is not easy as unwinding and correcting the impact of two income taxes and many benefits will take a fair bit of thought but we should start now."

Richards' blog readers agree

James writes: The published rates are somehow politically symbolic, rather than economically led. This is the case at both ends of the spectrum. I have seen very little logic in the discussions as to whether we would be better with or withoit a 50% rate.

"You see almost nothing about the marginal rates at the bottom, except a general feeling that it is not worth while for many poor people to work. I do believe that Ian Duncan Smith is attempting to deal with the bottom end, although I do not know the details."

Perhaps the last word should go the The Guardian's Will Hutton writes that the framework which allows the rich to make their money costs money itself so it "is proper that the rich should contribute proportionally".

He writes that the 50% tax rate debate is a misnomer:

"Pfizer did not recently close its operation in Sandwich, Kent, because of the 50% income tax rate: rather, massively concerned about its business model, it has concentrated research in those parts of the world where it judges that there is a strong ecology supporting the pharmaceutical industry.

"Equally Telefónica, locating its digital business in London last week, came because it liked Britain's openness and the ecosystem supporting its digital operation. The top rate of tax did not challenge this judgment."

"The top rate of tax can't alone be at the heart of a growth strategy. Britain needs more demand, stronger banks, better capitalism and sounder institutional structures to help us capitalise upon the coming wave of scientific and technological possibility. Get all that right, and growth and investment will follow. Wealth generation is about very much more than pampering the rich."

More:

Until the pips squeak

Why do the rich feel poor

Forget Spring Bank Holiday! May 30 is tax freedom day

2 thoughts on “One nation under one tax: But it’s not the rich who should pay more, it’s the poor who should pay less”

  1. David Lilley says:

    Simon,

    I thought that your previous artical was excellent and I will read your future blogs.

    You say above that “the predictive value of such comparisons is moot” yet you made them and even researched right back to 1907.

    I am always alarmed that so many Reuters business correspondents are Chartists and seek out so many would be prophets who typically add so many qualifications to their predictions that they say nothing. But are able to quote themselves later, is the prediction materialises, but do not requote their qulifications.

    Karl Popper demonstrated that we can never predict the future but only comment on a current trend that may end tomorrow. Eric Blair, aka George Orwell, wrote 1948 in 1947 but his publisher wouldn’t publish unless the title was changed to 1984 and the result was that it failed to be a warning about communist USSR aimed at his Stalinist associates.

    The current trend in the US is that payrole tax cuts are working. Fixing unemployment fixes everything including the deficit. We should also remember that only 64% of UK males of working age work.

    The thing that I cannot understand is that the $ is apprieciating, as you might expect, but the £ seems to be apprieciatung faster robbing Brits of the chance to share in the recent US growth.

  2. Simon Ward says:

    David,
    Thank you for your interesting comments. The six-recovery average has proved a good guide to the trend in stocks over the last couple of years. I have drawn attention to market deviations from the average in previous posts and they have subsequently been corrected. I don’t agree that forecasting is futile; however, I place much more reliance on monetary relationships than historical comparisons of this sort (which I don’t think are well-described as “chartist”).

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