The thorny electoral problem of “the rich”
Tax-hungry politicians like to target the rich. But defining who qualifies as rich is tricky, says Merryn Somerset Webb.
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