The New York hotelier Leona Helmsley once famously said that "only the little people pay tax". For speaking this great truth, Leona was audited by the US revenue service. They found out that she claimed deductions on furniture that she purchased for her home. She ended up in jail for tax evasion.
I was reminded of Leona when I read a comment on one of my recent posts. The reader claimed that one percent of the rich paid around 27 percent of UK tax revenues. So who is right? The reader who left the comment or Leona?
Personally, I am with Leona. To understand why, we need a quick dip into the structure of UK tax revenues. In fiscal year 2011, HM Revenues and Customs received £419 billion. Did a small group of high earners contribute over a quarter of this amount?
Let's start with the one tax where we can identify the underlying income distribution - income. This tax accounts for £153 billion of total revenues. That is only a third of all taxes. The super rich aren't paying huge amounts of income tax. After all, the wealthy aren't on an hourly wage. Moreover, only a tiny minority of income tax payers earn over £500,000 a year. That might be a comfortable salary, but it doesn't put the recipient in the same league as Warren Buffet.
There is a second wage based tax - national insurance contributions or NIC, from which the Treasury picks up another $96 billion. However, NIC has an earnings cap. So, the super wealthy aren't paying significant amounts of PAYE or NIC.
What about the underlying income distribution of people paying all the other taxes? Can we say how much these taxpayers earn? I don’t think so.
Corporation tax is another big tax revenue earner. This tax, by definition, is not paid by individuals. It is paid by firms. The "one percent pays 27 percent" can't apply here.
VAT is another big one. This tax is levied on consumption and it comprises of 20 percent of total revenues. The "one percent" is definitely not consuming 27 of GDP; the underlying tax base for VAT. So, I reckon the claim fails here too.
Then we have the naughty taxes, or as I prefer to call them, morality taxes; duties on tobacco, wine betting, fuel, air passenger duty and so on. These taxes raise about £50 billion. Again, it isn't the one percent who are consuming a quarter of the countries' beer and tabs. It is ordinary individuals.
So, how much tax does the one percent actually pay. In terms of a precise number, I suspect no one really knows. If anyone tells you that they do know, ask them where their number comes from. If it is from a survey, then laugh loudly. When it comes to disclosing income and tax payments, people routinely lie in surveys.
Notwithstanding this difficulty, it is hard to see how the one percent could be paying a significant amount. The tax system relies very heavily on consumption taxes - VAT, duties, excises. Ordinary people - not the rich, who are paying those taxes. As for income based taxes - income tax and NIC - very little revenue is generated from the highest earners. There is a very simple reason for this; the rich don't become rich because they receive wages. They become rich through the acquisition of assets and asset-appreciation. That kind of wealth creation is out of the reach of the UK tax system.
If the rich aren't paying then who is putting up the bulk of the cash to keep Her Majesty's Government running? It is the middle-classes that pay the bulk of income tax and national insurance contributions. It is people earning between £50,000 and £150,000 a year and buys lots of stuff to generate VAT.
Leona has sadly long since passed away.To digress slightly, I don't think she was the monster she was painted out to be, but that story is for another post. Nevertheless, her words are immortal; they live on. The principle holds true in the UK. We don’t know precisely how much the rich pay in taxes, but we know they don’t pay much. The responsibility for paying taxes is left to the little people.