Should we tax the ‘rich’ more?
Tax! A hated necessity, we recognise the need for it, but we have serious disagreements over who should pick up the tab and to what extent.
According to the IFS, the top 1% of earners in the UK pay more than a third of the UK’s total income tax, and who are the top 1%? They are those who earn at least £160,000 per year as a national average of the 1%, but in London the top 1% are those who earn more than £300,000 per year. And if you’re earning more than £70,000 per year, you’re amongst the top 5% who pay 50% of all income tax.
Does that mean 95% of the rest of the population pay the other half? No. In fact half of the population are exempt from making payments due to changes in policy such as increasing the personal allowance at a rate faster than inflation. The people who are being squeezed to fund an ever more costly UK are those on the cusp of being a higher rate taxpayer and higher/top rate taxpayers.
Higher earners are being taxed more than ever before in ever more ingenious ways which include:
- Tapered removal of the personal allowance as income exceeds £100,000 (this causes the 60% tax, more on that later!)
- Cuts in income tax relief for pension contributions
- Reduction in the lifetime allowance
- Tax on accumulated savings and investments already paid for with taxed income, only to be taxed again by way of further taxes such as capital gains tax or inheritance tax
The irony is that most of the above changes have happened under a Conservative government.
The key question is whether the tax burden on the wealthiest members of our society is a fair one. At this stage, I honestly don’t know the answer to that but it doesn’t feel fair to seemingly penalise geeks at school who opted to study, or an entrepreneur who was willing to take risks, and work 100hr weeks to build a business that goes on to provide valuable services and create new jobs. It’s also not fair that wealthier individuals fund an NHS that they are unlikely to use as they can afford to pay for private health care.
But then again if the other 95% of the population didn’t exist, the top 5% most likely wouldn’t enjoy the income that they currently receive, as it’s only because the other 95% buy or consume the products and services of the top 5% that they can command the income they do.
It’s also wrong to assume the wealthier simply work harder, lots of students work hard and lots of low-income families work incredibly hard but their income doesn’t reflect the economic contribution they make to society by simply being hardworking decent human beings who raise their families well by teaching them good values. What I believe many low-income families lack, is the opportunity to learn new skills in order to increase their income and improve their livelihoods. That lack of opportunity is not merely because of unaffordable course fees but constraints on their economic development through no fault of their own but only their circumstance.
The point I’m trying to make is good citizenship offers serious economic benefits for all as there’s less reliance on public services be it the NHS, Police or social security which should mean a healthier society, confident in the security provided with more disposable income to spend on what the wealthy have to offer. Therefore, it makes sense if the wealthy seek to be as successful as they intend to be, they need to invest in developing a healthy market.
But of course, based on the above statistics they probably have a disproportionate burden, and to risk taxing them any further, would be to risk losing an English speaking internationally mobile British educated professional to a more favourable tax jurisdiction. And when I say the ‘wealthy’, don’t think of CEOs and Directors of companies listed on the stock exchange but rather and more accurately think of talented teachers, doctors, dentists and small business owners among that category.
Ok, does that then mean we need to tax the 95% more than we are? No. They can’t afford it, and doing so, could literally cause hardworking low-income families to collapse which would also have unintended negative economic consequences. So, what’s the answer? Heaven knows and I’m pretty sure neither Boris nor Corbyn have a practical and equitable solution either. But I have some reflections which I’ll share in another piece.
Mohammad Uz-Zaman is a private client trust and estate planning consultant who holds accreditations across regulated financial advice and estate planning. He holds graduate and post-graduate degrees and he is also an associate member of the Society of Trusts and Estate Practitioners (STEP). He works closely with financial advisers, general practice solicitors, accountants and investment managers from several major practices.