Friday 20 April 2012

In Britain, only the little people pay taxes

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.

9 comments:

Chief of men said...

she died just under 5 years ago.is that long since ?

Alice Cook said...

Chief of men,

that is a matter of perspective; although I thought it was a little longer than that.

Alice

Chief of men said...

her husband (who had all the money) died first and he was older than her so you may be forgiven for thinking that she too had passed away long ago after all her rise to fame was 30 years ago.whilst she was in prison he turned the night lights off in the empire state building to protest.those were the days but you must admit she was right.

Electro-Kevin said...

My guitar shop friend (I visited him today) is being crippled by VAT at 20%.

Then there are the suppliers screwing him too if he under-orders (risk of being cut from their supply chain)It really is a tough business ... being in small business

Here's my demonstration of the guitar I bought from him. Finishes with Wild Wood as promised some while back. I like to be loyal to my local suppliers.

http://www.youtube.com/watch?v=YuCBDicNMbg&feature=channel&list=UL

Every little helps, I suppose.

Jim said...

You have misunderstood the statistic: 27% of income tax comes from 1% of income tax payers. Not 27% of all tax comes from 1% of the people.

Link:http://www.bbc.co.uk/news/uk-politics-15843746

You also have to remember that the super rich often pay themselves in dividends from their companies, which have withholding tax taken off at source. They then pay income tax on the remainder to make up the same tax rate as if they had the income directly (less NI, as dividends are unearned income).

So as well as paying 27% of all income tax, the 1% most likely pay a large percentage of dividend withholding tax as well.

Then there's corporation tax. If you own your own company making millions you pay corporation tax on those profits before you can take the dividends out (and pay tax again on them). So the super wealthy are paying large chunks of corporation tax as well.

Then VAT - while the 1% probably dont pay as much of a % of VAT revenue as they do income tax, I'd hazard a guess that they pay more than 1% of it. If you earn (and spend) £100K you undoubted pay a greater % of your income in VAT than a person on £25K, given the basics (food, rent/mortgage and heat/light) are either zero or low VAT rated.

Vast swathes of the UK population are net tax consumers, not payers. Most pensioners, all those working for the State, all those on full time benefits, and many who do work, but receive in work benefits. Plus many more whose jobs in the private sector rely on State contracts for their income.

Millions of people are being kept by the taxes paid by just a few tens of thousands of people. A little gratitude wouldn't go amiss.

Alice Cook said...

Jim

First of all, thanks for a really thoughtful comment.

There was much I could agree with, in particular your views on net tax consumers. I also think you are right when you say that millions of people are being "kept"" thanks to the welfare system. However, I think it is the middle class that are providing the support. Agreed; a little gratitude would not go amiss.

Still, I am sure that the wealthiest 1 percent are not paying anything like 27 percent of total tax, which is the concept that matters. As for your clarification on income tax, I looked at this recently and I was surprised at how low the income levels were for the top earners. The threshold was "only" 500 grand.(at least that is what I remember)

Here, I would like to make a distinction between the top one percent of earners and the wealthiest one percent. These are two different groups.

It is a point I will address in a later post.

Alice

Alice Cook said...

Jim

First of all, thanks for a really thoughtful comment.

There was much I could agree with, in particular your views on net tax consumers. I also think you are right when you say that millions of people are being "kept"" thanks to the welfare system. However, I think it is the middle class that are providing the support. Agreed; a little gratitude would not go amiss.

Still, I am sure that the wealthiest 1 percent are not paying anything like 27 percent of total tax, which is the concept that matters. As for your clarification on income tax, I looked at this recently and I was surprised at how low the income levels were for the top earners. The threshold was "only" 500 grand.(at least that is what I remember)

Here, I would like to make a distinction between the top one percent of earners and the wealthiest one percent. These are two different groups.

It is a point I will address in a later post.

Alice

Jim said...

@Alice: Yes indeed there is a difference between the 1% with the highest incomes and the wealthiest 1%.

However income is a flow (repeated constantly) and capital is a stock (only added to by saving or astute investment). Income can be taxed, not with impunity but with a degree of positive trade off between the cost to the individual vs the benefit to society at large, and the individuals therein. Ie its in our own self interest to pay some taxes to fund the police for example, or defence, or even some sort of basic benefit and health system. And as our incomes repeat monthly , yearly etc, there is a less of an issue with parting with a percentage in return for the benefits of some collective action.

Taxes on capital are a different kettle of fish. Once a society starts taxing capital, it is eating its own seed corn. Capital is what makes us truly wealthy as a nation, not income. So if you tax capital you either end up taxing income by proxy - ie everyone can only own the amount of capital that their income can pay the capital taxes on and therefore pays pretty much the same amount of tax as they would if income were taxed (this is what LVT would achieve), or if you punitively tax capital above certain amounts, the capital is eaten up in taxes slowly over time (what happened to the large land estates post 1900 due to inheritance taxes). And of course you then get capital flight, as who wants to leave their capital in a country that is slowly expropriating it? It also discourages saving, as if income is tax free and capital taxed, why not spend all your income now and have no savings?

It is a sign of a society that is rotting from within that attempts to tax capital over income to a large extent.

Jim said...

Here is a very instructive chart from the Taxpayers Alliance:

http://www.taxpayersalliance.com/economics/2012/04/rich-poor-middle-pay-lot-tax.html

As you can see the top 10% pay well in excess of their income share in income tax (34.9% of income but 57.6% of taxes), the top 25-10% (the well-to-do middle class if you like) actually pay slightly less than their share, and everyone else pays considerably less than their share.

We have (like it or not) a highly 'progressive' tax regime.