Should we get rid of the top band of income tax? Anyone earning over £150,000 pays a marginal tax rate on their income of 52% (50% in income tax plus 2% in national insurance). This week lots of economists have written to the FT insisting that we should. You might want to discount their views on the basis that most of the probably earn more than £150,000. But I think that would be a mistake.
I’ve written about the 50p rate here several times before and my own view is that we should probably get rid of it too. Why? We know it costs us a fortune as the mobile and well off head for happier tax homes. We know that Labour only want it to stay as a “socialist article of faith” rather than as a money spinner.
We know that paying over 50% of your income to the state is something of a psychological barrier for the well off. We know that if they don’t stump up one way or another, the rest of us will have to make up the difference. A punitive tax rate on the rich which they avoid necessarily ends up with middle-income earners paying more tax.
It is also worth reminding yourself just how much tax the rich already pay in the UK. Alistair Heath sums this up nicely here. But in a nutshell, the top 1% of taxpayers (roughly the £150,000 and above lot) pay around 27% of all the income tax paid in the UK.
Another “astonishing statistic” from Heath is this: the 14,000 people in the UK that earn more than £1m a year will pay £14.2bn in tax this year. As such they will contribute nearly as much as the 14 million people earning up to £20,000 a year, who between them will hand over £14.9bn.
We all pay too much tax, but suggesting that the rich (the rich who aren’t avoiding tax, that is) aren’t bearing their share of the burden seems a little unfair in light of these numbers.
But the main problem I have with constantly putting up taxes to deal with inequality is that it is a foolish way to deal with the problem. It goes for the symptoms, not the causes of the problem. I wrote back in June about research which shows that in general inequality doesn’t matter to individuals if they feel that people are mostly afforded the same opportunities. What bothers them is when they feel that the wealth of those at the top of the tree is undeserved.
And that’s where we are now. The 50p rate is the government’s way of admitting that too many people have high incomes for the wrong reason, and of attempting to calm public anger about it. However to my mind we’d be better off skipping the punitive taxation bit and focusing on dealing with the unequal opportunities bit.
We need to encourage growth (something the 50p rate most definitely does not do) so that everyone has more chances, and we also need to address the causes of undeserved wealth inequality. In my editor’s letter a few weeks ago I noted that the huge amounts of money made by Britain’s bankers can only be paid because they are able to make the super-high profits to pay them. The same goes for super-rich CEOs. They are overpaid because shareholders let them become overpaid.
So instead of bumping up income taxes (and driving away genuine entrepreneurs along the way), why not force big shareholders (mainly fund managers) to take more responsibility and give more power to small shareholders? And why not find a way to force banks to be more competitive? Surely we’d be doing more good if we focused on dealing with some of the regulatory and oligopolistic causes of inequality than on the symptoms?