Top earners pay more, and so they should

Tim Montgomerie quotes Allister Heath in City AM:

“The top 10 per cent of earners are already set to pay 53.6 per cent of income tax in 2008-09; the top five per cent will pay 43 per cent and the top one per cent 23.9 per cent. Yes, that’s right, just one per cent of the population will pay close to a quarter of the total income tax take, funding a massive chunk of the welfare state – who ever said the rich don’t pay their “fair share”, whatever that means?”

It’s not clear where the figures come from but they sound right. The inference, however, is wrong.

First, take a look at this graph compiled by Left Foot Forward using data from Manifest and the Office of National Statistics’ Annual Survey of Hours and Earnings, which shows how the salaries of those at the very top have spiralled out of control in recent years.

Many readers will be familiar with the increases in inequality over the last 30 years. But the recent Compass report ‘In place of cuts‘ (p.15) detailed how the richest 10 per cent now earn more than 10 times the bottom decile. The 9th decile earn four times the 2nd decile. So the high proportion of income tax paid by the richest represents the extraordinary increases in earnings that they have enjoyed in recent years.

Tax by decileBut take a look at this other graph from the same report which shows the percentage distribution of taxation by decile group. Depressingly this shows that as a proportion of income, the rich do not bear the highest tax burden.

Instead, because of the existence of regressive consumption taxes, which unite Left Foot Forward and Guido Fawkes in opposition, the poorest have the highest overall tax burden.

The richest get away with paying a smaller share in tax of their overall income than everyone earning above median income.

This doesn’t look very fair to Left Foot Forward.

10 Responses to “Top earners pay more, and so they should”

  1. Will Straw

    RT @TimMontgomerie: Did you know that the top 10% of earners pay 54% of all income tax? <– Why this is perfectly fair http://bit.ly/8Nn6V1

  2. Guido Fawkes

    We’re only united if you support lower taxes for the lower paid.

  3. willstraw

    I’d support that. But I think we’d differ on how to make up the shortfall.

    I’d get government receipts back to 38% (and possibly to 40%) through higher national insurance contributions from the richest, equalising capital gains tax, and cracking down hard on tax avoidance. Whereas I suspect you’d bring down public spending.

  4. Old Holborn

    Actually, unless a contract exists (signed by both parties) for any services or goods, no one can demand money from you. By Law.

    I no longer pay any direct taxes to HMRC. Council tax, income tax, the lot.

    I have not requested a British Potato Council or my rubbish collected every two weeks, so stop sending me bills.

    It’s that simple

    http://www.tpuc.org/

  5. Liz McShane

    Old Holborn – so who is making up the shortfall for your opting out of paying taxes? Some things are not a la carte.

  6. Sunder Katwala

    I would be keen to join this consensus on the distribution of taxes, while agreeing it would probably often not extend to the question of the balance of taxation and spending.

    However, there are much more progressive ways to reduce the tax share at the bottom than raising the threshold as the LibDems propose: we might be able to provide another graph-laden LFF post in explaining a better way to achieve the goal, perhaps the other side of the pbr.

    ***
    The interesting difference about ‘fair taxes’ is highlighted in Tim Montgomerie’s “their fair share, whatever that means”

    Tim is highlighting the overall proportion contributed, regardless (as Will observes) of means and income. The implication is that they are paying a fair share, or a more than fair share. Tim’s approach would be consistent with arguments for a flat tax, to which I expect Tim is somewhat sympathetic. If the rate is 20% or 25%, those who earn more pay a higher amount at the same rate.

    That is against the current approach of progressive taxation: a higher share is paid on higher earnings. Our public attitudes workshops for the JRF found strong support for this principle, and particularly strong fairness objections to a lower rate being paid by higher earners. (That also offends ‘live by the same rules as us’ instincts, which are very strong ‘process fairness’ instincts).

    However, the taxation system as a whole is not progressive: as Will shows. It is fairly flat, and sharply regressive at the bottom (because of the impact of indirect taxes particularly), and also regressive at the top, and also the impact of tax relief systems.

    There would be strong public support for addressing this in a credible way.

  7. Paul Evans

    Have a look? Top earners pay more, and so they should http://url4.eu/ta4p

  8. Old Holborn

    “Old Holborn – so who is making up the shortfall for your opting out of paying taxes? Some things are not a la carte.”

    I’ll let you know which bits I need to pay for, not the other way around. Feel free not to supply with whatever you like. I can buy it at half the price on the open market anyway.

  9. Matt Sinclair

    Will,

    I’m glad that we are finding a certain amount of common ground, that we need to fight high taxes on the poor. I think it’s important to point out though, that isn’t just the result of VAT, other indirect taxes are just as regressive:

    Green taxes. Push up the price of electricity – as current Government climate change policy does by 14%, and that figure is likely to rise sharply – and you will hit the poor far harder than the rich, as electricity is a necessity. We’ve pointed this out in a number of reports.

    ‘Sin taxes’ on booze and cigarettes. The minimum price on alcohol that was recommended on your blog the other day would hit the poor particularly hard, as it would be most likely to increase the price of cheap booze which sells to poor people.

    If you seriously want to cut taxes on the poor, that is going to be very hard to reconcile with a commitment to Pigovian taxation of any kind.

    Best,
    Matt

  10. Pigou versus Progress « Left Outside

    […] versus Progress Posted on January 11, 2010 by leftoutside To borrow directly from Left Foot Forward – Tim Montgomerie quotes Allister Heath in City AM: “The top 10 per cent of earners are […]

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