Saving Our Safety Net Fact of the Week: the poorest pay 47% of their income in tax (the richest pay 34%)
(Warning: long post.) In his Autumn Statement speech the Chancellor claimed to be a modern day Robin Hood:
In fact, the net contribution [to austerity] of the richest 20% will be larger than the remaining 80% put together – proving we are all in this together.
This is similar to an argument you hear frequently from right of centre journalists and politicians. Here’s a headline from the Daily Mail last month:
Britain’s 3,000 top earners pay more in tax than all 9m lowest-paid workers combined
There’s two things going on here. On is the annoying tendency of government ministers and media outlets to say “tax” when what they mean is “income tax”. The Mail article effectively concedes this point later when it clarifies the headline’s meaning as relating to “government revenue from income tax”. We all pay Value Added Tax whenever we go shopping, nearly all of us pay for TV licenses, most workers pay National Insurance Contributions and so on – no-one in this country pays no tax.
The second problem with this focus on how much tax the rich pay is that it uses the undeniable fact that the rich pay more in cash than people who aren’t rich to imply that taxes are spread fairly. Both these quotations suggest that, in fact, the ethical problem is that the rich are bearing an unfair burden. That’s not been a politically successful argument for the Right: as the Equality Trust has shown, most people support a much more progressive tax system.
Where this argument has been politically successful is in persuading people that our taxes are more progressive than they are and therefore that, as Mr Osborne says, “we are all in this together.” The Equality Trust research found that 68 per cent of people believe that the top “decile” (tenth) of the population pays a higher proportion of their income in tax than the bottom decile.
If we look at the latest official data, when we take all taxes into account and look at them as a proportion of gross income (original income plus benefits) for households divided into deciles by income, in 2012/13 the poorest decile contributed 47.3 per cent, compared to 34.8 per cent from the richest. The poorest pay a much higher proportion than other deciles, but even when you exclude the bottom decile it’s clear that the system overall isn’t massively progressive:
Who pays most taxes?
Note: taxes as a proportion of gross incomes
The richest are contributing more cash, because they started off with more, but it still doesn’t seem very fair. Indeed, once you think about it, the fact that the rich pay such a high proportion of total taxes is a sign that the distribution of original income is too unequal, not that the rich should pay less.
Why isn’t the tax system particularly progressive, even if you exclude the bottom decile? Regular readers of this column will know that I’m a strong defender of the redistribution carried out by the tax and benefit system. And income tax is very progressive – the proportion of their gross income paid in income tax by the richest decile is more than five times as high as the proportion paid by the poorest decile.
But other taxes aren’t progressive at all. And two are large and not progressive: Council Tax and Value Added Tax.
VAT and Council Tax as a Proportion of Gross Income
Raising VAT to 20 per cent will have had a disproportionate impact on poor families.
This still leaves a puzzle about the Chancellor’s claim that the richest are paying the most for austerity. The main tax change for them under this government has been a cut in the top rate of income tax, from 50 to 45 per cent. This doesn’t seem to square with this table:
This is taken from the Autumn Statement distributional analysis, but we could have used a similar chart from every Budget since 2010. A new report from the Centre for the Analysis of Social Exclusion, Were We Really All in it Together?, helps to solve this conundrum. One important part of the answer is that the Treasury’s analysis includes changes announced in Labour’s 2009 Budget and introduced in April 2010. The government has argued for the last four years that these changes should be included because they decided not to reverse them, but of course this comparison doesn’t really help us to understand what difference the current government’s policies have made. And, of course, it means that people whose top rate of tax went up to 50% just before the election and then went down to 45% in 2013 are shown as losing from direct tax changes.
The report’s highly respected authors – Paola De Agostini, John Hills and Holly Sutherland – conclude that the changes to benefits, tax credits, pensions and direct taxes since May 2010 have not benefited the poor:
Across the income distribution as a whole, the changes were regressive. On this comparison, the bottom half lost (with the poorest groups losing most as a proportion of their incomes) and the top half gained, with the exception of most of the top 5 per cent (but excluding the very top, gaining from the cut in the highest rate of income tax).
Most analyses of this sort have looked at what has happened to different income quintiles, as in the chart above, or sometimes to deciles. The new CASE report is much more detailed, and looks at the balance of gains and losses for twentieths of the income distribution (‘vingtiles’). This is important, because most people in the top 20 per cent, or even the top 10 per cent don’t have incomes high enough to pay the top rate of tax but the incomes of the very rich are enormous, big enough to distort what happens to the top 10 or 20 per cent. When the impact of policies since May 2010 are analysed in this way, most people in the top 20 per cent are actually gainers (principally from the increased personal allowance – so much for this being a progressive policy) and it is only in the top 5 per cent that people are worse off overall:
One final twist is that, within the top vingtile, “those in the top one per cent represented in this survey emerge as narrow gainers as a result in the cut of the top marginal rate from 50 to 45 per cent, comparing the 2014/15 system with that in place in May 2010.”
I suppose you could say this shows that the massively rich have been favoured over the merely very rich. But I doubt if this is the group anyone feels sorriest for – despite the best efforts of the Daily Mail.