Budget 2012: The myth that lower taxes for the rich generates more tax revenue


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Danny Dorling is a visiting fellow at the Institute for Public Policy Reasearch (IPPR)

One of the greatest myths that was regurgitated in the aftermath of the budget was the claim the tax take on the rich rises the less they are taxed.

Greedy-bankersIt was said this occurred when Nigel Lawson was chancellor in the 1980s. What actually happened in the 1980s was that as the rich took a greater and greater share of national income the share of income tax they paid went up.

The richest 1% now pay more than a quarter of all direct income tax. This is not because of the 40%, 45% or 50% top tax rate, but because they now take home such huge salaries and bonuses (and incomes in other forms).

Today the best-off 1% take home a greater share than they have done at any time since directly after the First World War.

Allowing the richest 1% to take home more and more income and pay less tax does not create wealth and jobs. Employment levels have been highest in Britain in the years when the richest 1% had their lowest shares of national income, from 1945 to 1979.

The richest 1% didn’t pay a great absolute amount of income tax then because they were not taking such a high and unfair share of all the monies paid out in wages and salaries nationally.

 


See also:

Budget 2012: The “dead man’s hand” of slasher Osborne 25 Mar 2012

Budget 2012: Here’s what LFF readers think of the budget 23 Mar 2012

Budget 2012: The IFS’s devastating picture that shows we’re not all in it together 22 Mar 2012

Budget 2012: Impact per decile – the poorer you are, the harder you’re hit 21 Mar 2012

Budget 2012: It may do nothing for growth, but the fat cats will purr more loudly 21 Mar 2012


 

It was not the high tax rates that meant the tax take from the richest was less then, they were less rich and so had less to tax, as Figure 5 shows, and there was less need of their taxes because a wider cross-section of society had enough then to contribute.

Figure 5:

Income-consumption-ratio-top-10-per-cent-v-bottom-10-per-cent
In a report (pdf) published by IPPR today, “The case for austerity among the rich”, I try to make this case and show just how much, in both the UK and USA, incomes have become concentrated at the very top of society so there is now so little to share around amongst the bottom 90%.

I show how an increase in incomes of 1% of those 9 out of ten people, coupled with reductions in income at the top, would save trillions of dollars and billions of pounds a year. I then show how this occurred before (in the 50 years from 1920 to 1970).

Those items of discretionary spending that would be most hurt by a little more austerity among the rich are listed: luxury cars sales, board school receipts, and Michelin star restaurant profits, and the geographical part of the country which would lose out economically is highlighted. There would be a few losers as well as millions of winners from any slight movement towards greater equality.

The mainstream advocates of a little austerity for the rich in mainland Europe and the United States of America are also listed, places where a little haircut for the rich is a much less alien concept.

The paper uses IMF figures to show just how low public spending in a country like Britain gets when you end up relying on such a few very wealthy people to pay so much tax (so much it cannot be repeated enough, because they pay themselves so much).

Even under New Labour, as Figure 2 shows, public spending in Britain was lower than in all but a tiny handful of European countries (Spain and Ireland) and the USA, and it is set to fall below all of them by 2015 under coalition policies.

Figure 2:

Public-expenditure
The UK is slowly transforming itself into one of the most unequal, most low taxing, most low public spending countries within the rich world.

That transformation began under Margaret Thatcher, was slowed under John Major, accelerated again under Tony Blair, slowed a little again under Gordon Brown, and is now accelerating again under the coalition.

Under Tony Blair, the highest paid 0.1% of households gained from ‘earning’ 61 times the average wage of the bottom 90%, to receiving 95 times their average wage a year by the time Blair resigned. It was possible to get away with this then because of overall income growth (a very little at the bottom, a great deal at the top).

For the government now, as their economic arguments fail, they may come more and more to rely on hate to maintain their credibility. Hate ‘benefit-scroungers’, hate ‘immigrants’, hate the last government said to have ‘overspent’ your money.

It should be possible to offer an alternative to hate. And an alternative to simply offering the policies of the coalition a little watered down. A small part of that alternative would be the case for more austerity among the rich and dispelling of the myth that reducing taxes on the rich somehow makes the other 99% better-off.

 


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  • Fat

    I don’t feel I have enough authority to comment on the majority of what you just said, but sorry, your suggestion that the equalisation of wealth has always led to massive social problems is ridiculous. It’s just not as simple as that

    Take the example of the USSR. It wasn’t because of their attempts to equalise wealth that they had social problems, it was because of the hectic structure of the Soviet Union, the disassociation between the leaders and the people, the gargantuan size of the union and the scale of the task of running it under one central government, corruption in the Soviets and local leadership, and a hundred other reasons that I can’t think of off of the top of my head.

    And none of the examples you cited were democratic, thus meaning they’re less likely to have social equality (as history shows!), which begs the question: would/did the said governments even care about wealth equality? Likely not. And citing leaders’ pledges to ‘help the proletariat’ is of course flawed; of course they’re going to tell the people they’re trying to excerpt control over anything that will keep them docile. For example, I read somewhere (though I can’t be sure of its validity), that the North Koreans are told that Kim Jong-il invented the hamburger, because the NK gvmt wants to produce hamburgers due to their efficiency, but they don’t want the NK peoples to know that the US invented them because they don’t want Western influence in their state.

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  • Guest

    You mean the theory that has meant that Hong Kong has an unemployment rate of 3% and Switzerland is riding high on production growth. You mean that theory? or are you one of those people who believes that we can just keep borrowing money and then print it to pay off the debt?

    Tax avoidance in Scandanavia is rife, and their total tax take is lower than in the UK. Their income taxes are higher, but their secondary indirect taxes mean the overall tax burden is lower.

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  • Anonymous

    Neither use anything like your theory. You are talking about an unprecedented shift of power to Corporations over governments.

    The state of the UK economy MOCKS your theory.

    (And the wealthy in the Nordic countries DO pay over 50% tax…tax avoidance in the UK (especially corporation tax) is also VERY common)

  • Anonymous

    Smaller. It’s the middle class who make it bigger.

  • Anonymous

    The Nordic Nations have near-(and over in some cases) actual 50% tax rates for the rich.

    Moreover, income tax is progressive, whereas many other forms of tax are regressive.

    And yes, in context tax rates for companies should scale with their salary multiple, including contractors.

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  • Guest

    Actually Switzerland is one of the most economically free countries in the world. Not only Switzerland but also Hong Kong and Singapore prove that you don’t need a big government. It is complete nonsense to say that there is a shift in power from government to corporations. It is a shift in power from government to people. Giving them the opportunity to make decisions about their society and well being with every pound they spend. The government should not be allowed to intimidate the population into submission. Did you support the bailing out of RBS and Lloyd’s? or the suspension of competition laws for Lloyd’s so that they could buy HBOS? Well too bad because if you disagreed with it you couldn’t do anything about it.

    The UK economy has not had a free market system for over 100 years, so how exactly it mocks my theory I am not sure. The UK economy is in a mess because we spent too long thinking that we could borrow and print our way out of trouble. That is not a free market, that is promoting failure and rewarding cronies no matter how they behave.

    Regarding Nordic tax I don’t think you were listening. There is a difference between income tax rates and total tax take. This is primarily explained by tax incidence.

    I am interested, what do you propose we do for the economy?

  • Anonymous

    Hong Kong and Singapore are city-states. If you declared London independent and instituted a totalitarian state, I’m sure you could achieve similar results.

    In reality, you’re calling for the American system where the government exists for the profits of corperations, not the people.

    No, where people are able to be free is the Nordic counties. Where the state ENABLES that individualism and high standards of living by supporting people and allowing free association.

    You’re pushing for more of failed policies. You’re trying to wreck the economy further, when we’re following the WORST path of the major economies.

    You’re the one who isn’t listening. To the statistics and the economics and the history. You’re determined that your feral 1% control everything.

  • Guest

    What a load of rubbish. How is supporting the idea of a free market, regulated by a strong rule of law supporting the 1%? It dismantles entreched corporations and stops them from existing in the first place. It allows people more choice as to who supplies them goods and services. It says that the state has no place in business. I hate the American model. It is corrupt and looks after the interests of power groups such as the Military industrial complex.
    So please, read about what a free market system actually represents. It is the antithesis of what you seem to think it is.

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  • Anonymous

    I strongly support the free market.
    You’re supporting something different – capitalism.

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  • Anonymous

    I really don’t care which way it goes.

    I am retired now. My mother was thrown out of the British Communist Party for being too radical but when I was old enough to vote I decided that the way to go was to vote for the party which supported business. I never got a single O-level but I wanted to succeed. I was always too busy to worry about people richer than myself earning the cream. I was content in running my businesses until they were successful and then selling them to people who didn’t have the knowledge to start them up themselves. I did this five times over my working life.

    I tried to get a degree with the Open University twice, but never got past the first credit and gave up on education realising I didn’t have the ability.

    The lesson here is, stop being envious of the rich – no matter how they got their money – and try to earn a better living for yourself and your family – you owe it to them.

    AAT

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