The thorny electoral problem of “the rich”

Rich person throwing money around © Getty Images
The definition of who is rich is constantly shifting

What is rich? With less than 30 days until the general election, it’s a question that is going to come up over and over again. Back in my City days, people used to say that being rich was having £10m in the bank. But that was a London house price boom and a pay revolution ago. It’s probably £25m now.

It is a little different for politicians. For Alistair Darling, rich might have been an income of £150,000 – the rate at which he introduced his 50% tax rate. But the former chancellor wasn’t 100% certain that you needed that much to be rich. It might also have been an income of £100,000 – the level at which he started withdrawing the personal allowance from workers, hence giving them a marginal tax rate of 60% (surely a rate only the really rich should pay?).

But then his definition of rich could also have been the ability to have £255,000 left to play with after you had met your living expenses – that’s where he left the annual pension allowance. On the capital side of things his number was somewhere around £1.75m – this was the lifetime allowance at the end of his tenure (the lifetime allowance is the amount you are allowed to have in your pension before any excess is hit by an effective extra tax of 55%.)

George Osborne sort of disagreed with his predecessor: he took the top income tax rate down to 45%, but he left the allowance tapering as it was. Then, for good measure, he took the pension annual allowance down to £40,000 and introduced the pensions taper with its two Darlingesque definitions of rich – the “threshold” income of £110,000 and the “adjusted” income of £150,000 (if you earn this much, save into a pension and don’t know what I am talking about, call your accountant right now.)

All in all, his version of rich was rather less generous than the now Lord Darling’s. Osborne’s definition of the level of capital you need to be rich was a bit different too: when he left Number 11, the lifetime allowance had shrunk to a mere £1m. David Cameron, then prime minister, was in the same zone on this: his obsession was getting the effective inheritance tax nil-rate band up to £1m – hence the downright weird contortions of the family-home allowance (known as the residential nil-rate band, or RNRB for short).

I assume these two had the odd chat on the numbers, which rather suggests that for them “wealthy” (in the context of other people at least) meant about £2m of assets – a million quid in a pension (inheritance-tax free) and another £1m on the side (unless you were a non-dom, in which case you were automatically considered rich regardless of income).

Over the past decade then it looks as if there has been a rough cross-party consensus about what rich is. It is income of £110,000-£150,000. And it is wealth of about £2m (note that was also where Ed Miliband’s mansion tax was going to kick in).

But that’s the past. The sands are shifting. And the question now is who will be defined as rich in the era of Theresa May. We know what shadow chancellor John McDonnell thinks. He is going for anyone who is an asset stripper, tax avoider or greedy banker. Failing that he will settle for anyone earning more than £80,000 (this won’t include the MPs’ salary of £74,000, you will note.)

The Conservatives are fond of calling everything Labour says nonsensical. This isn’t so much that as just an obvious vote loser. MPs get paid the same every year regardless of how long they have been doing the job and regardless of how good they are at it. That seems to make it hard for them to grasp that the rest of us move in and out of income bands all the time.

A teacher makes under £40,000 for most of their career but if they are good, they might make deputy head or head at some point and be paid £80,000 or more for a few years. The same goes for a doctor, a lawyer and an accountant. They might not be making £80,000 now, but they certainly plan to.

Entrepreneurs as well. A one-man plumbing band might make £25,000 in a start-up year. But they will be hoping for £80,000. So will the web designer, the novelist, the trainee middle manager and the architect. In any one year, 5% of the income-earning population will earn £80,000 or more. But over a career, many multiples of that will make £80,000 in at least one year. So why would they vote to be penalised when they do?

Still, McDonnell is rather less relevant at the moment than May. Who will she define as rich? She says she doesn’t want to increase the overall level of tax in the UK (which she probably couldn’t anyway – as a percentage of GDP the tax take is near its highs). But she wants a “fairer” country. And she says she’d like to reduce taxes on working families. I think the “rich” can all take a stab at what that might mean for them: I’ll be watching for more taxes on wealth rather than income.

But wherever May sets her own thresholds, this election should give her the chance at least to make life less complicated for those knocking around inside the current definition of rich. A good manifesto on tax would get rid of all the nightmare tapers – on income tax, on pension payments and on the RNRB (your heirs lose a pound of this for every £2 your estate is over the threshold).

It would abolish the lifetime allowance and probably end the current system of offering pension tax relief at everyone’s marginal rate too: the much-suggested alternative of getting everyone to pay into their pensions net and then adding a bonus of 25p-30p in the pound up to an annual bonus limit would be beautifully simple.

If she were brave (and I suspect she is) she could also abolish inheritance tax with all its silly rules and allowances (gifts from income, £250 a year to anyone, gifts to people getting married, farms, Aim stocks, anything after seven years, and so on) and replace it with a lowish gift tax on all exchanges of capital (regardless of whether its owners are dead or alive).

None of this would have the rich contributing much less in tax. But it would make their financial lives much simpler, freeing them up to spend less time calculating and avoiding tax bills and more time creating wealth — which is surely what everybody wants.

  • This article was first published in the Financial Times

  • AAJ

    I hate the idea that someone is rich if they earn £80k for a year. Gross income in a single year is no measure of wealth. As someone who has no assets, but is trying as hard as he can to earn £80k, I feel less wealthy than someone who has a house, but only earns half my salary. But somehow when I reach that £80k target (must work a little harder, must take no days off sick, must take fewer holidays), somehow I’ll be rich and become a target for politicians and society will turn against me as some kind of toff to be punished.

  • Horiboyable .

    The state are turning us into unthinking drones.
    NHS Hospitals are no different than the pyramids of Egypt. We are just being abused as slaves.
    I see our neighbours, Germany in Europe is now confiscating private property to house refuges. The founding fathers of the USA were correct, the biggest abusers of individual rights and liberty is the state.

    • Peter Edwards

      Good on the Germans at least they have the right idea.
      Houses are for people to live in, not speculate on rising land values.

      The states are also the biggest wealth creators mankind has ever seen.

      • Horiboyable .

        Germans have the right idea to steal their citizens property from them and then give it to rapugees.
        Can you see where you might be wrong in your thinking?
        The state creates NOTHING, individuals do. The state is a consumer of wealth not a creator. If you put government in charge of a desert you will soon run out of sand.
        Peter you are a good example against democracy. Stupid people trying to enslave smart people through the use of force and violence which is why you will always fail.

    • Andrew Crow

      I’m not sure the comparison of NHS hospitals and Pyramids is valid.

      We have some funny ideas about private property. Some of the native American tribes thought the idea of owning the land was laughable – until they were forcibly silenced – by the holy founding fathers and their ilk.

      Karl Marx’s assertion that property is theft is not entirely without merit. Certainly it deserves consideration. We have tenure for our lifespan. Hereditary rights are not a law of nature they are a man-made convention.

      Somewhere between those two fairly extreme positions there’s some middle ground that politics is supposed to negotiate whilst we all try to have a life.

      • Horiboyable .

        So Bill Gates mind is public property. He developed Windows in his mind and now the state owns his own personal thoughts!! Once the state creates a precedent for the removal of individual property, nothing is safe, not your car or your business. Then economic activity halts as because people think what’s the point of producing anything if the state can arbitrarily remove at anytime.

        Your look at wealth like the savages before you, that wealth is a static quantity. That wealth needs to be fought over or stolen but it was American’s that were the first people to realise that wealth has to be created.
        You about to witness the collapse of socialism in Europe, just like her sister philosophy, communism in Russia did. Venezuela tried 21st century socialism and now the folks there can not buy toilet paper and are breaking into zoos to eat the animals. America headed down that socialist road and now it is failing. Socialist always destroy their hosts, the producer.
        There is no middle ground once you mix poison and water in a glass, it is only poison that can win.

        • Andrew Crow

          Yes. There is a sense in which the product of Bill Gates’ mind IS public property. While it was still in his head it was his, but once he let it out of his head and released Microsoft on the world it became a common good. It’s common in the sense that we all live with the consequences – the computerised new information age is not, anyway, just Bill Gates. There are millions of contributors to it and Bill Gates has reaped a huge financial reward for sharing his insights (and still does). A vast number of other people also reap huge benefits including the army of cyber security specialists who have to deal with the flaws inherent in the Gates vision.
          The market doesn’t always produce the best solution and a lot of people who understand computerised systems (which I don’t) will tell you that Microsoft is actually not very good. But it proved highly marketable and we’re now stuck with it.

          I have to agree with you that the role of ‘The State’ is frequently far from benign. Whether the state pretends to be communistic or capitalistic it will interfere with the lives of individuals at every level it can. This is due in part to the failure of practical democracy. In theory we elect governments to serve us, but they take the power we cede to them as an invitation to behave like monarchs – tyrants even. Irrespective of their political hue they assume powers over us that we never consciously intended to give them.

          Anarchy would be nice, but is not really a viable system in a society larger than a hermitage.

          Your poison analogy is both right and wrong. The amount of poison in the mix is crucial. This is after all the basis of immunisation against disease – a little bit of poison makes us stronger by allowing us to develop resistance to it.

          Some people would quite reasonably question whether, in political terms the socialism or the capitalism is the poison.
          Either way the mixture has to be just about right for a society to thrive. Too much of either and we are in the gulag or the jungle.

          • Horiboyable .

            How do you define COMMON GOOD????????
            We are not robots or cars, we are individual human beings with different aspirations and desires on many issues.
            It would be in the common good of mankind if we were to terminate the lives of people with low IQs so the thinkers, the strong are not weighed down by stupid unthinking welfare recipients. Is this the common good you speak of?

            • Andrew Crow

              No it would not be to the common good to exterminate people with low IQs. That would possibly be to the good of the strong, the thinkers (in which group you naturally include yourself). Be assured that on somebody else’s list you would almost certainly be selected for extermination for …..your skin colour, your religious beliefs, being too clever or not clever enough or having red hair which seems to be a popular crime these days.
              I’m afraid the common good by definition includes the slow witted too. We can’t all be Einstein, nor would it be desirable. The point of the common good – of what some people refer to as the ‘good society’ is that you DON’T allow one elite self selected minority to exterminate everyone they don’t approve of. You don’t let them have all the cake either.
              But neither do you have to pretend that everyone is the same or that we all must want the same thing.
              Life does not have to be a zero sum game. There will always be zero sum elements because two people can’t exist in literally the same space simultaneously, but there’s enough room for them to stand relatively close together without throwing brickbats at each other.

  • Andrew Crow

    Given that every new piece of tax legislation produces at least two loopholes – one either side – and some of them four: because there’s above and below to consider too., it would make a great deal of sense to have a radical overhaul of the tax system so that people can actually understand it.
    There is a logic in taxing assets (land and property) rather than income. Anyone interested in taxation should seriously consider that income tax (including corporation taxes) have a disincentive effect on industry (in its widest sense – like doing something). Just because it was the best (or simplest) system of taxation that someone could think of at the time of its introduction doesn’t mean it is still fit for purpose.
    One obvious advantage is that land and property can not be exported to offshore tax havens.
    Property is more valued and valuable in the areas where infrastructure facilities are best. That may mean peace and quiet and space, or it may mean hospitals, schools and transport links; it doesn’t matter what it is people are prepared to pay for, the market which we apparently so adore, would adjust the taxation to the prevailing trends irrespective of some arbitrary threshold that a chancellor decides constitutes being rich. Income is a poor measuring stick.
    Everyone hates tax. And we shouldn’t do. We should feel that we are making a fair contribution to the fabric of a society in which we can thrive.
    If some of the brains that currently seek to circumvent the tax system were applied to designing a better system we would all benefit.
    Poachers turned gamekeepers is what we need.

  • Magnolia

    If I wanted to get more tax then I would tax the capital gain on the main family home. A government could go through with it by using present council tax bands as a measure of present value and then applying the gain from this point in time on. I think it would be a cruel and bad policy because we are not an overtaxed country but that is what I think government will do because it will never cut spending and they will come for tax take wherever they can steal it!

Merryn

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