Tuesday 17 April 2012

Don't pick on the rich; why ordinary people should pay more tax

The rich should pay more tax. I bet you haven't met many people who would disagree with that statement. Even our so-called Conservative Chancellor has recently complained about the lack of revenues coming from the nation's wealthiest individuals.

The problem is how to get the rich to pay up.

There are four great truths about the wealthy. They explain why the principle of taxing the rich will never form the basis of our tax system.

First, rich people own stuff, like companies and land, and over time these assets becomes more valuable. They don't receive wages. Taxing capital appreciation is very hard. Revenues can only be realized when the rich sell their assets, which the don't do very often.

Second, rich people often borrow large amounts of money to buy valuable assets that generates more wealth. Moreover, they use the assets they already own as collateral. Very few people became wealthy without first becoming heavily leveraged. In contrast, poor people have no assets, can't borrow and therefore remain poor.

Leverage also helps reduce tax burdens. The rich, through the companies they own, can use interest payments reduce their taxable income. Leverage also dramatically complicates tax arrangements and this confusion always favours the rich. A clever well-paid accountant, with their interest deductions and write-offs, will always outmaneuvers a poorly paid tax inspector.

Third, globally they are footloose. They may choose to live in London today; New York tomorrow, and Mumbai the day after that. If the tax rate in one country is too high, they move to another country with a lower rate.

Fourth, wealth buys political power. With pliable politicians, the rich influence the tax system, creating complicated loopholes, and as we already know, a confused and badly drafted tax system facilitates tax avoidance.

Taken together, this means that the rich are never likely to be the primary source of taxation. Over time, our tax system has come to reflect the inherent difficulty of getting the rich to pay more. Just look at tax revenues. Value-added tax and income tax are the two main pillars of our tax system. The burden of both taxes fall heavily on ordinary individuals. These two pillars are supported by resource taxes, for example those levied on North Sea oil, and penalty taxes, such as those levied on smoking, drinking and gambling. Wealth taxes contribute only a negligible amount to overall revenues.

Bereft of any easy pickings from the wealthy, the UK tax system essentially takes money from the middle-class through income tax, and from everyone through consumption taxes like VAT. Taxes are mostly a middle class affair.

The distributional aspects of government expenditure and more complicated. Some expenditures are directed towards the poor, such as unemployment benefit. Other public expenditures, such as health and education, are enjoyed by the poor; the comparatively well-off; and everyone in between.

This leads us to the irresolvable tension embedded in our system of public finances. The wealthy have largely exited the system, both in terms of being beneficiaries of public expenditures and in terms of paying taxes. The middle classes receive extensive benefits from system and pay heavily for it, in terms of income and consumption tax. They would like to see their tax burden is reduced, but they don't want to endure any expenditure cuts. The poor pay only a marginal amount of taxation, largely through VAT, but they receive significant benefits from public expenditures. They want to see more public expenditure and are indifferent to the tax burden.

This means that there is always a coalition to keep public expenditure high, in some cases, to increase it. The number of voters who want to reduce taxation is always in a minority.

So public expenditure just keeps on rising, and taxation fails to keep pace. How does the government make up the difference? It borrows. It passes the burden of paying for current public expenditure on to future generations. They are utterly disenfranchised since they don't vote and in many cases have not yet been born.

It is a dishonest system, and this is where the rich become very useful. It allows everyone to conjure up a solution that superficially seems plausible. The rich have more money; therefore they should pay more taxes. If it were that easy, it would have happened already.

The harsh truth about UK public finances is that the people who benefit from it also have to pay for it. That means us. If we want less tax then we must have lower expenditure. If we want to stop burdening future generations with large debts, then revenues must equal expenditures.

So forget about the rich. They live in a different world. They don't get much out of our current system of public expenditures. They have no intention of paying more. They have ample means to avoid tax.

The rest of us must pay. That is how it has always been, and it will never change.

22 comments:

Barman said...

Excellent article!

The only thing I've never really believed is that globally they are footloose.

I'm sure their assets are but I don't really see the rich moving with their families, etc. every time the tax system changes. They have no need if their accountant has done his job properly.

The bottom line is that if you taxed the rich (in fact everybody) at a reasonable rate they'd be happier to pay it and less inclined to try and avoid it.

Jim said...

The top 1% pay 27% of income tax payments. Thats hardly having 'exited the system'.

The point is not that the 'rich' (whoever they are) are not paying 'their share', its that the rest of us (the broad mass of the population) want a higher level of public spending than can be sustained from our taxes.

According to the Treasury figures released recently there are about 35000 tax payers who declared incomes in excess of £500k pa. Using rough back of a fag packet calculations I reckon those people have total income of about £50b/pa. If you expropriated all of it there would still be a budget deficit of c. £70bn/pa (at current spending rates). Of course you'd only get that once , so it wouldn't really help.

There aren't enough 'rich' to pay for the millions of the rest of us to live as we would like. Thats the harsh realisation we need to come to.

RenterGirl said...

The rich should not avoid paying tax. They should get clobbered big time, if they do. Tax avoidance is a blight, and even if technically legal is immoral.

Sackerson said...

The reason the rich pay a significant proportion of income tax (which itself is NOT a major portion of total government revenue) is that they have so much of the income and wealth.

If the average earners had had their fair share of the (increasingly fake, twisted) economic growth over the last, oooh... 40 years, they'd be paying plenty tax and the economy and society would be far sounder.

As it is, average employed taxpayers pay around 40% on the margin in tax/NIC when you take into account employer's NIC; and even the poor pay something like that, though in their case it's because of indirecdt taxation.

William said...

I'm not rich (family of four living very well on £15K a year) and I avoid or evade tax wherever possible. It's not hard to do either and I would argue it is everyone's moral responsibility to at least avoid paying tax whenever they can.

I don't draw any state 'benefits' and am constantly seeking ways to reduce the tax thieved from my income.

Tax is theft always has been always will be quite why people seem to accept tax as a necessity of life baffles me.

Electro-Kevin said...

William - Could you please visit me and give us a financial make-over ? I'm at a loss as to how a family of four can live well on £15k can live well without some form of assistance. But good for you if you can. We're on a lot more than that and it must be our tax exposure making things difficult.

Alice - Any ideas of what revenues and economimies from shale gas might do for us ? Is it likely to reduce inflation by much ? I read that there is such a thing as shale oil too. Will this bring new boom times perhaps ?

Anonymous said...

Tax is state-sanctioned theft, plain and simple. Trying to land rich people with an unfair proportion of the tax burden has never, ever worked and will never work however many times idiot politicians try it on.

As things stand, the top 1% pay 27% of income tax, and the top 10% pay about 55% of all income tax. By my reckoning this is very nice and generous of them as it saves the government coming after middle earners like me, and saves me the hassle of wriggling out of the burden. Gibbering fuckwits who try to land the rich with yet more tax liability are going to see the rich simply buggering off out of the country entirely.

This is the Laffer Curve in action. Over-tax people and they respond to it, usually by reducing their tax burden. The simplest way to do this is by not working as much, or by departing for sunnier climes, or by engaging good tax accountants. Rich people do all of these when state thieves come a-knocking.

Try instead rationalising how a government uses tax monies. Much of what the State does, it doesn't need to do. International development ought to be the province of charities only; governments have no business extorting money from their own citizens to give away to foreign crooks. In any case, if aid was going to solve Africa's poverty it would have done so by now what with the amount of cash we've hurled at the useless buggers over the last 50 years or so. It ain't working, so let's not do it until we know why it doesn't work.

And stop insisting on more tax, yer stupid plonker!

Weekend Yachtsman said...

It's also true that there simply are not enough "rich" to pay for what everybody else wants.

I have seen an analysis done in the US, where the entire wealth of every billionaire, every successful sportsman, all rock stars, and many "ordinary" millionaires, was assumed confiscated en masse - lock stock and barrel, every penny: and it was just (just!) enough to finance the State for one year. The article concluded "and the next year, you have to do it all again".

Never was Bastiat's observation more true: "The State is the fiction by which everyone tries to live at everyone else's expense".

The State as we have come to know it is unsustainable; it has to change. The question is whether we can get people to accept that, or whether we carry on regardless until the end arrives willy-nilly.

Jim said...

@Weekend Yachtsman: the analysis you mention can be seen here:

http://www.youtube.com/watch?v=661pi6K-8WQ

Very instructive.

Kitz said...

Renter girl ,whats immoral is to expect and to force some people to give over half their working life to others .

Kitz said...

The average Brit has £2240 saving.At what point do you become rich?

dearieme said...

There is one type of wealth that is more readily taxable than others - property.

Otherwise, what you say is true. The rich are few and footloose. And, in at least one case, are able to profit from the fruits of Feminism - no, mate, my wife owns the company and she lives in Monaco.

Jim said...

@Dearime: Whatever the pros and cons of land value taxes, they definitely do not tax the uber wealthy. They tend to tax those wealthy enough to have nice houses but not enough wealth to leave the country, ie the upper middle classes. Not the hedge fund managers, City bankers, premier league footballers, or FTSE 100 CEOs. In fact I suspect the 1% would do rather well if income taxes were replaced by those on property.

Electro-Kevin said...

Problem is this. And I quote John Redwood here - me mentions an ice cream vendor paying £3k pa for his licence and how debilitating it is:

I pointed out that - in a socialist Britain - if Mr Whippy wants customers he's got to pay for them.

Most of us are paid by the state either directly or indirectly (I include most private sector workers too.) Very few people are involved in export.

I was in a restaurant the other night where the proprietor would consider herself to be running a private sector buisiness - all of her customers that night were teachers, police officers, council officials ...

Even when her restaurant isn't packed with those on direct state pay it's those who service their cars, build their extensions, cut their hair.

All of that requires a lot of tax for Mr Whippy to have anyone to sell his wares to.

Jim said...

@EK: And if your restaurant proprietor didn't have to pay VAT, Employers NI, Business rates etc etc on her business, and then NI, income tax on her profits (if any) then would she need so many customers in the first place, and would her prices be a fraction of those she has to charge in order to cover all those taxes?

The UK economy is completely skewed by the presence of the Leviathan that is the State. Everything is is vastly mispriced because of the State. Some things are massively overpriced (everything we buy), others completely underpriced (due to the State giving it away free, or below cost - education healthcare, benefits etc etc).

So while your restaurant owner may rely now on teachers, doctors and nurses to buy her meals, in the absence of such a State interference in her business she would be able to price her meals lower, and attract customers whose wealth does not come from the State. That would be a much more healthy state of affairs.

Mark Wadsworth said...

"rich people own stuff, like companies and land, and over time these assets becomes more valuable etc"

Exactly - but the land bit is easily fixed - just tax the rental value of land as you go along on an annual basis and cut taxes on earned income. If people have set up their own companies and thereby become rich, well good luck to them, there's no reason to make such people pay more tax.

Mark Wadsworth said...

"[The rich] don't get much out of our current system of public expenditures"

Oh yes they do! They own the land! All that tax expenditure flows back to them as rents.

tinks said...

Super post and thread. It would seem the rich who benefit least pay the most tax, perfectly understandable for them to reduce their burden - as should we all.

The problem is one of expenditure and a state that is too big for its books.

Great points about the costs of doing business and the distortions that effectively cripple and stifle the economy, whilst the state employee by and large carries on eating in restaurants oblivious to it all, holding their hands out for more.

There are no easy answers.

davidb said...

Its not the "rich" individuals that are shirking the tax. Many multi national companies dont pay any tax or pay very little. This is a problem for the whole western world. I read stories like Diageo moving brands to other jurisdictions to reduce their tax bill. Google pays next to nothing as its revenues are chanelled through Eire to keep its tax bill down. There is a problem in all western economies of giant corporations which dont pay tax anywhere. Wasnt that what the revenue discovered Lloyds had been up to when the treasury got to look at the books once we owned it?

Rich individuals are not the source of big money. Its giant companies. Little guys have to pay their corporation tax. Google doesn't.

Jim said...

@DavidB: So Google is actually paying tax, in Ireland, just not here then? Is that your beef that companies choose to pay their tax where the rates are lowest? If income tax rates were lower in some towns than others, wouldn't you want to go and live there if you could? I know I would.

You are falling into the usual trap of 'There's a big pot of untaxed money somewhere, and if only we can get our hands on it, then we'll be in clover'. There isn't. And if there was, its the sort of money that can up sticks and leave at a moments notice. And you can't stop it, unless you want to turn the UK into a new version of North Korea, or Albania under Enver Hoxha - a sort of 'Ourselves alone' type of nation. If you want the benefits of big global corporations (and there are huge benefits in employment as well as tax), then you have to accept that they can leave as easily as they come.

Its as Alice said in her post - if the broad mass of the UK public want the level of public spending they have become used to over the last few decades, they are going to have to pay for it themselves, through their taxes. The 'Rich' aren't (and can't) pay for it all for them, nor will the corporations. If you want everything the State provides for free right now, you'll have to pony up the tax to pay for it.

mombers said...

"They don't get much out of our current system of public expenditures"
The bloke in a £100m house gets maybe £99m for free from the government. Take that house and airlift it to Somalia, it would be worth much, much, much less. The difference between Somalia and the UK is that we have public safety (the army and police) and excellent public services (transport, cleanish air and water, etc). If you abolished taxation on income, turnover and profits for everyone (the rich and the poor), and replace it with a tax on this £99m unearned land value, everyone who works or generates profits would be better off. No more tax evasion or avoidance, and fewer low skilled people forced onto unemployment because the profit margin on their work is not enough to pay for the VAT, NI and other taxes that are currently incurred under our topsy turvy tax system

david b said...

No @ Jim. Google it. Google has a sophisticated operation going where it pays in the single digits in company tax. Many companies do things which are against the spirit if not the letter of the tax code in their domicile. I have no time for tax and spend government. I too think taxes should be low. But tax systems should be simple. And either everyone should be paying them or noone should be paying them. And that applies to giant multinationals as it applies to the chippy in my high street.

I dont think bankers should be paying 50 % tax. I dont think guys who do overtime should be paying 40% tax. And I certainly dont think theres much incentive to earn more when you pay more tax as a percentage by doing so. But if the chippy owner cannot afford to domicile his profits in Bermuda and so pays the UK corporation tax rate on the UK profit he makes, then Google should be paying the same rate of corporation tax as any other UK business, and not 1/10 th of that rate. I doubt in reality that theres 3 billion dollars in profit to be wrung by any company from its Bermuda operations.