Fraser Nelson: wrong on cutting taxes for the rich

Fraser Nelson has a piece in the Spectator this morning in which he claims that the way to ensure the rich pay their way in taxes is to...cut their taxes. There is an elephant in the room, however.

Fraser Nelson has a piece in the Spectator this morning in which he claims that the way to ensure the rich pay a greater share in tax is to…cut their taxes.

“In 1987/88, the best-paid 1 per cent contributed just 14 per cent of all income tax. Once the top rate fell from 60p to 40p, the proportion paid by the richest 1 per cent soared to 21 per cent where it stayed.”

In other words, the rich are more inclined to pay taxes when they perceive them as fair. Low taxes also encourage an entrepreneurial dynamic which in turn creates wealth and therefore more higher rate taxpayers.

He produces a table to support his proposition:

The graph does indeed appear to show that as the top rate tax was reduced over time, so the proportion of income tax revenue paid by top rate taxpayers increased.

There is an elephant in the room, however, and that is the fact that as inequality soared in the 1980s and 1990s so the income earned by higher rate taxpayers soared too. This would, inevitably, mean that there was more revenue eligible for tax.

Another point (unrelated to Fraser’s point about the top 1 per cent but important all the same) is that there were more higher rate taxpayers at the end of the 1980s compared to the 1970s. See the third column from the right in the below graph.

Higher rate taxpayers

Very few people paid the 60 per cent or 83 per cent higher tax rates. In 1979, 2.6 per cent paid the higher rate. In 1989 6.1 per cent did so, and so on. As there were more higher rate taxpayers, and as the top one per cent saw their earnings increase, there were higher revenues, obviously.

This is a far more satisfactory explanation than one offered by Fraser.

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