According to new figures published by HMRC last Friday, the top 1% now pay a higher share of Income Tax receipts than at any time in past twenty years. Close to three in every ten pounds that the government receives in Income Tax is paid by just over 300,000 individuals. Even as Covid-19 puts increasing pressure on public finances, this statistic will be grist to the mill of those who argue that the rich cannot be asked to pay more. But does it tell the whole story?
Our recent research shows there’s a lot of variation in the taxes paid by the rich. Most of the revenue from the top 1% comes from a cohort of high-earning employees, who pay the often-quoted top rate of 45% Income Tax plus 2% National Insurance Contributions, with minimal deductions or reliefs. But a substantial minority pay much lower rates, especially taking into account capital gains, which offer an alternative way of taking rewards, mainly for the richest.
Using anonymised data from personal tax returns, we show that in 2015-16 the average rate of tax paid by people who received £1 million in taxable income and gains was just 35%: the same as someone earning £100,000. But one in four of these paid 45% – close to the top rate – whilst another quarter paid less than 30% overall. One in ten paid just 11%—the same as someone earning £15,000. The rich, it seems, are not all in it together.
These low rates are not driven by complex tax avoidance schemes; they’re part of how our system is designed. Where you get your money from (or at least how you package it) matters, because investment income and capital gains are taxed at lower rates than income from work. What’s more, as the National Audit Office recently highlighted, the government offers tax reliefs claimed to incentivise activities like entrepreneurship, without actually checking whether they achieve these aims.
A new Alternative Minimum Tax could put a floor on the lowest tax rates. If set at 35% on taxable income and gains for all those with over £100,000 per year, we estimate that this tax could raise £11 billion per year. That’s equivalent to raising both the Higher and Additional rates of Income Tax by 5p, but instead of everyone on high incomes paying more, it would be targeted at those currently paying the lowest shares.
Still, some people report relatively little income and gains, even though they have a lot of wealth. For example, business owners who retain profits within their company, or people whose wealth is held in assets that don’t produce an income stream, like land with long-term development potential, luxury items such as yachts, and people’s main (and additional) homes. The Alternative Minimum Tax would not raise more from them.
A wealth tax – based on a person’s total assets, minus any debts – is often suggested as the solution to this problem. The UK has never had a wealth tax, although it came close in 1974. Several other countries do have taxes of this kind – and some, including Switzerland, Spain and Norway still do – with varying degrees of success. But there remains a lot of misunderstanding about whether and how a wealth tax would work in the UK: as well as concerns about fairness, it would raise many new administrative challenges.
That’s why we’re launching a new project to investigate whether or not the UK should have a wealth tax, and if so, how to design it. After the launch event today, we’ll be bringing together a network of world-leading tax experts – academics, practitioners and policymakers – to look at the evidence, international experiences and practical issues. We’ll deliver our final report by December, with all of the evidence and analysis being completely publicly available. In an era of difficult decisions, we need to move beyond simple headlines, and combine radical thinking with careful, expert analysis.
Authors
Arun Advani, Associate Professor of Economics at the University of Warwick and CAGE Impact Director
Andy Summers, Associate Professor of Law at the London School of Economics and CAGE Associate
Notes
This article was published in the Times Red BoxLink opens in a new window on 2 July 2020. The article is reproduced here with permission from the Times.
