As we approach the annual UK budget from the coalition government, the cries for a cut in the top rate of personal income tax have reached a crescendo from the top 1% of income 'earners'. Some 507 supposed 'entrepreneurs' have written a joint letter to the conservative Daily Telegraph newspaper calling for the abolition of the 50p in the £ top rate of income tax which was introduced by the outgoing Labour government for those earning over £150,000 a year.
This is what the 'entrepreneurs' said in their letter: "Given the state of the British economy, we urge George Osborne, the Chancellor, to consider scrapping the top rate of tax in his forthcoming Budget. The tax, which is in effect a 58p tax after national insurance is taken into account, puts wealth creators like us in a very awkward position. We believe the richest should help the poorest in society. One per cent of taxpayers are already responsible for 24 per cent of income taxes. But penalising high earners through an unfair, politically motivated tax puts populist politics before sound economics. The 50p tax is set to reduce government income, and damages the economy, the public services and charitable giving. As business people, we want to see our industries, our economy and the Third Sector thrive. Repealing the 50p tax would demonstrate the Chancellor's wish to celebrate British entrepreneurialism, stimulate industry and contribute to the Government's growth agenda. The sooner the top rate of tax is repealed, the better."
The right-wing freesheet City AM paper has added its vigorous support to this call. "It is good to see that 507 entrepreneurs have put their names to a campaign to abolish the 50p tax rate. It discourages investment, reduces incentives, chases away talent and sends a message to the world that the UK no longer values achievement and success. The rich suffer – but not as much as the poor and the middle classes, for whom job opportunities are reduced. The tax raises hardly anything and will actually reduce revenues over time."
The paper quotes one of signatories, Andrew Denny, boss of Fix-a-Form International, who said: "I am simply trying to create wealth for me, my kids and my loyal staff. Why are high earners treated like they have committed a crime and should be punished? The government must listen to entrepreneurs. It is they who are creating the jobs and the growth that the UK economy desperately needs. You can't tax a country back to prosperity."
This is just nauseating. The 50p tax rate for the top earners was not introduced to 'punish' capitalists as though they had committed a 'crime'. It is an attempt (and a very bad and feeble one) to address the growing inequality of income in Britain (as in many other mature capitalist economies) and to increase the contribution of the richest to government revenues at a time of crisis that the UK government says "we are all in it together". Apparently, the likes of Mr Denny don't want to be in with the rest of us. The 50p tax is making it impossible for him to "create wealth for him, his kids and loyal staff".
There is an explicit assumption by Denny that it is he that is 'creating' wealth for all in the UK economy rather than just his company (i.e. him) and that it is he in particular that is creating wealth rather than his 'loyal staff' who won't be paying the 50p tax rate. And anyway is the 50p tax rate that onerous? Mr Denny will pay the 50p rate on only anything over £150,000, not on all his income. And, of course, we assume that all his income comes from profits and dividends in the company and not from capital gains on buying or selling property or stocks and shares, where tax rates are much lower.
If tax does stop 'wealth creation' under capitalism, it is not the taxation of any income taken by an owner, but the size of taxes on the profits and employment in companies, large and small. Most limited companies pay tax at 20% in the UK. According to Price Waterhouse accountants, between 2006-2009, the average effective tax on UK companies was 23.6% compared to 27.7% in the US, 27.1% in Australia, 27.9% in Germany, 29.1% in Italy and 38.6% in Japan. On this measure, Britain was near the bottom among mature capitalist economies. For example, 'low corporate tax' Ireland was actually higher at 24.7%. So the 507 entrepreneurs already have a tax break to help them 'create wealth' – a low rate of tax on companies. If they reinvest their profits of their businesses, instead of paying themselves more than £150,000 a year, the 50p rate would not affect them. And then there is a second tax break for them – gains are taxed at just 10% when they sell their enterprises. That's a nice payout for 'wealth creation'.
City AM's editor nevertheless hammers on. Heath says in another editorial, "The next argument is that those on high incomes don't pay their fair share. The evidence shows this to be untrue, except, of course, if you are a Marxist who believes in entirely eliminating inequality and seizing all of the top earners' income. The top one per cent of taxpayers (who roughly coincide with 50p tax rate payers on £150k or more) are expected to have earned 12.6 per cent of total income in 2011-12, down from 13.4 per cent at the height of the bubble; they will have paid a massive 27.7 per cent of all income tax, a new record. Without the top one per cent's tax payments, the welfare state would collapse and the UK would go bankrupt; they pay for a disproportionate chunk of public services."
It certainly is a relief to know that without the rich we would have no welfare state and we would be bankrupt. Of course, without the rest of us paying tax, that would be four times more likely than if the rich did not, on City AM's figures. This argument is bit like that of the 18th century economist Bernard de Mandeville who argued that no poor person would get a job if it wasn't for the rich spending their income on the luxuries of life to create jobs for the rest. It's the 'trickle-down' theory of economics, favoured by entrepreneur Denny above who personally creates wealth and jobs for his 'loyal staff'.
But this figure of the share of the total personal income tax take in the UK that the richest earners contribute is misleading. If the top earners' income rises faster than those with median average incomes and there is no reduction in tax rates, then the rich will pay a higher share. And of course, that is exactly what has happened, both in the UK and the US. Income inequality among working-age people has risen faster in Britain than in any other rich nation since the mid-1970s, according to a report by the OECD. The share of the top 1% of income earners increased from 7.1% in 1970 to 14.3% in 2005. That share fell back during the Great Recession, as City Am says, because property values and the stock markets plummeted. But it is on the rise again now.
The issue is not how much of the total national personal tax take is paid by the top earners but whether, as a share of their total income, they pay too much or too little. In the US, back in 1980 the top 1% paid about 34% of their declared income in personal income tax compared to a 15% share for all taxpayers. Interestingly, in the Reagan era, the golden days of 'free market' America, that ratio between the rich and the average did not move. But now, the top 1% pay only 23% of their declared income in personal tax compared to 12% for the average. So everybody's personal income tax burden has fallen (mainly because taxes have been switched into consumption taxes like VAT, customs taxes or other taxes on utilities and air flights etc).
For example, in the UK since 2001, tax receipts have risen £126bn. Of that rise, only £46bn has come from income tax, a relatively progressive source of revenue (where the rich pay a higher share of their income than the poor, precisely the complaint of the rich!). But the rest of the extra tax receipts have come from regressive taxes (where the rich pay no more as a proportion than the poor and sometimes even less). For example, social security contributions, which are at a flat rate, have raised an extra £33bn, VAT another £23bn, and various so-called 'stealth' taxes on fuel, air flights, tobacco etc have raised another £16bn. Income tax has raised just 36% of the increase in the total tax take in the UK since 2001. So cutting income tax for the rich is not going to make much of a dent on the overall tax burden.
Actually, the total tax burden as a share of GDP is not particularly high in the UK. In 2011, the OECD estimated that government revenues were 40.4% of GDP compared to 45.3% in the Eurozone area. The Scandinavian countries have a total government revenues at around 50-55% of GDP (and yet the economic growth performance and standard of living is better than in the UK). Indeed within Europe, only Ireland has a lower overall tax burden.
In the US, the top 1% pay less out of their incomes in income tax now then they did 30 years ago. They now pay 1.9 times more as a share than the average income earner, compared to 2.25 times back in 1980. The burden has fallen for all, but it has fallen much more for the very rich earners (see http://taxfoundation.org/staff/show/195.html). Using data from the UK's HMRC, I calculate that, in the UK, the top 1% were paying about 34% of their income in personal tax in 1992 and that is the same ratio now. That average income earner was paying around 18% then and now too. So the ratio between the two groups is much the same as in the US and has not changed in the last 22 years – hardly an increased burden.
And all this assumes that those who are in the higher rate tax bracket are actually paying it 50p in the £ for every £ above £150,000 a year. Tax avoidance and tax evasion are rife and not every penny of tax that is due is paid and collected. The tax gap in the UK between what corporations and higher earners should pay and what they do pay is estimated at £50-70bn a year.
The other argument trotted out by City AM' s editor above is that the 50p tax rate is self defeating in that it deters 'entrepreneurs' from building their businesses, so they 'create' less income tax revenues. And some even leave the country, reducing further the tax intake. So raising the top marginal rate of income tax could actually lead to a fall in revenues. This is the infamous Laffer curve argument named after Arthur Laffer who advised the US Republican administration in the 1970s. He developed a curve to show what was the optimal top tax rate before the tax take starts falling. Tory MP John Redwood has been arguing this optimal rate is well below 50p in the £. Yet all the latest evidence (Peter Diamond and Emmanuel Saez) estimates that the optimal rate will be as high as 76%. So the 50p rate for very top earners will still bring plenty more revenue.
This brings me to the sorry plight of Andrew Schiff, marketing director for Euro Pacific Capital. According to Bloomberg news, Andrew Schiff earns $350,000 a year, enough to put him in the US' top 1 percent by income. But Schiff says that this does not cover his family's private-school tuition, a Connecticut summer rental and the upgrade they would like from their 1,200-square- foot Brooklyn duplex. His 10-year- old daughter is a student at $32,000-a-year Poly Prep Country Day School in Brooklyn. His son, 7, will apply in a few years. "People who don't have money don't understand the stress. Could you imagine what it's like. I got three kids in private school, I have to think about pulling them out? How do you do that? I can't imagine what I'm going to do. I'm crammed into 1,200 square feet. I don't have a dishwasher. We do all our dishes by hand." He wants 1,800 square feet – "a room for each kid, three bedrooms, maybe four," he said. "Imagine four bedrooms. You have the luxury of a guest room, how crazy is that?" The family rents a three-bedroom summer house in Connecticut and will go there again this year for one month instead of four. Schiff said he brings home less than $200,000 after taxes, health-insurance and 401(k) contributions. "But I don't want to whine," Schiff said.
In such a crisis for the top 1%, reducing their tax burden is the least that society could do.