The Institute for Fiscal Studies has issued a new report this morning which is firmly in their own tax territory and appears to make recommendations that make sense for a change.
As they note:
Concerns about how much income ‘the rich' have, the activities from which it is derived, and how much tax is paid on it are central to debates about inequality. In part, this is driven by the fact that the share of income flowing to the top of the income distribution has risen and is now much higher than in the early 1980s.
As they add:
In this chapter, we use data from tax records, which provide better information on top incomes than is found in survey data, to set out what is known about who has top incomes in the UK and how much tax they pay.
The executive summary is worth sharing:
- The top 1% of UK adults received 15% of fiscal income in 2018–19. This is more than flows to the bottom 55% of adults combined. The top 1% share was around 6% in 1980 and 10% in 1990.
- The majority (65%) of fiscal income for the top 1% of adults comes from employment. (Employment generates 77% of income outside of the top 1%.) Top 1% wage earners work disproportionately in the financial sector, which is very geographically concentrated in London. The financial sector has been important in driving the growth in the top income share.
- Business income – from either self-employment or from owning and running a company – is much more important in the top 1%, and especially the top 0.1%. It accounts for 21% (29%) of income for the top 1% (0.1%), compared with just 9% for those below the top 1%. The broad composition of top incomes has changed relatively little since at least the early 2000s.
- The self-employed in the top 1% work disproportionately in professional services partnerships, including large legal and accountancy practices. Mean fiscal income of a self-employed person in the top 1% is £423,000, more than 30 times the UK median. In comparison, company owner-managers in the top 1% have a lower income on average (£294,000), but are much more evenly spread across a range of industries.
- Taxes on UK incomes are progressive – those at the top of the income distribution pay a greater share of their (fiscal) income in tax than those at the bottom. The top 1% of adults paid 34% of income tax in 2018–19. They paid 28% of income tax and National Insurance contributions (NICs) combined – a substantial increase from 20% in 2003–04. Taxes are less skewed to the top when including NICs because the marginal NICs rate falls from 12% to 2% for higher-rate taxpayers.
- Income taxes reduce post-tax top income inequality, and have done so to a larger degree since 2010. The top 1% (0.1%) received 11% (4.6%) of post-tax income in 2018–19, compared with 14% (6.1%) in 2009–10. The fall in post-tax top income shares is in part due to policies that raised more tax from the top, most notably through a new ‘additional rate' of income tax.
- Average tax rates vary significantly within the top 1%. For example, the average tax rate on wage earners in the top 1% is 42% (49% if including employer NICs). Company owner-managers will be able to access a rate of just 27% on income taken in the form of capital gains – or of 0% if the realisation of gains is deferred until death.
- There is a strong case for aligning the tax rates on different forms of income, while reforming the tax base so that taxes on business income do not discourage investment. This combined approach would directly improve horizontal equity, and allow more revenue to be raised from the top 1% if desired.
I have written extensively on what those reforms might be. A collection of material on this issue is available here.
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There is an argument to say the overall tax burden in the U.K. is way too high (it’s the highest it’s ever been).. yes cut the burden for the less well off by all means..
What we need is to restore the redistributive quality of the tax system
Yep. I agree 100%.
However, I do have a problem with some MMT supporters who overuse the argument that there is no need to tax the more affluent because a currency issuing government can always find the money to ‘fund’ its spending.
This is of course true. If there are spare resources available in the economy there is no reason why governments shouldn’t spend to prevent them going to waste; but, are resources going to waste at the moment due to lack of demand? Obviously some are but the extent of this needs to be evaluated much more carefully than it is.
Whichever way we look at the issue, taxing the rich has to be primarily about reducing their economic power and their demand on the available resources in the economy. Such as their ability to afford expensive lawyers and political lobbyists. Otherwise, what’s the point?
I am actually reassured to see that the overall tax rate on the highest salary earners is 42%. But the rate should apply to all sources of income equally.
The tide of neo-liberal bad ideas seems to have suffered what I am sure we all hope is more than a temporary check, but in a country where our most influential media owner is a foreign citizen and our second most influential media owner is a non-dom, if the current Tories stay in power, you have to wonder how long it will be before this current little difficulty is forgotten and our Prime Minister is either a non-dom or a foreign citizen.
A country that can elect Johnson to the position of what is supposed to be our most trustworthy public servant is capable of anything.
If you recall, Johnson was born in the US. He expatriated in 2017, after he realised that as a US citizen he was subject to US tax on his worldwide income and gains, including gains on real estate that were exempt from capital gains tax in the UK, because the US main residence exemption has a cap of $250,000 of gains. We should cap our exemption too.
For what it is worth, I expect Johnson had a UK domicile of origin from his father so won’t have been able to claim the remittance basis, but as his paternal great-grandfather was Turkish, there is at least a possibility of them inheriting Turkish domicile. I expect at some point the father or grandfather established a domicile of choice in the UK.
I think his claim to be non-dom would be remote
No more than mine to be Irish domciled – and I am not
I agree with that
When even the IFS is more concerned with inequality than the government we should be worried, very worried.