The top 1% pay a lot of tax - will they stay or go? Posted by David Smith at 09:00 AMCategory: David Smith's other articles My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt. Today I want to lift my sights high. So high, in fact, that it takes me to the very top of the income distribution. These are the people who earn many times the average salary, are mainly not Premier League footballers (though they clearly do), and who are endlessly fascinating. I do so for three reasons. The very well-off, the top 1%, and even more so the top 0.1% will become even more important as a source of income tax revenues if Boris Johnson carries out his leadership pledge to reduce the tax burden on those slightly lower down the income scale. That pledge,
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The top 1% pay a lot of tax - will they stay or go?
My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.
Today I want to lift my sights high. So high, in fact, that it takes me to the very top of the income distribution. These are the people who earn many times the average salary, are mainly not Premier League footballers (though they clearly do), and who are endlessly fascinating.
I do so for three reasons. The very well-off, the top 1%, and even more so the top 0.1% will become even more important as a source of income tax revenues if Boris Johnson carries out his leadership pledge to reduce the tax burden on those slightly lower down the income scale.
That pledge, you may recall, was to increase the threshold at which people pay the higher, 40%, rate of income tax from £50.000 to £80,000. I don’t get the sense that the government is yet moving heaven and earth to deliver on that pledge but, when it does, the proportion of income tax revenues paid by those on incomes above £80,000 will rise.
It is already, as you will know, high. This year, according to Her Majesty’s Revenue and Customs (HMRC), 29.6% of all income tax revenues will be paid by the top 1% of taxpayers, and just over 50%, 50.1% to be precise, by the top 5%. Very soon, it seems, the top 1%, who account for roughly a seventh of incomes, will be paying a third or more of income tax revenues. Their share 20 years ago was 21%.
It is important to note that we are talking about only one tax here, admittedly the important one of income tax, which will bring in £190bn this year, which is skewed in this way. Others by and large are not.
This takes me on to a second reason for writing about the highly-paid. The income tax system is already progressive – the top 50% pay 90.8% of revenues and the bottom 50% just 9.2% - and Labour would want to make it more so. Many at the bottom pay no income tax at all.
Labour’s current plans envisage introducing the 45% tax rate on incomes of £80,000 or more, and 50% on incomes above £123,000. If your earnings are £80,000 or thereabouts and the Johnson government carries out his pledge to raise the threshold, voting Labour would imply a significant personal sacrifice.
Mainly I am writing about the top 1% this week, however, because the Institute for Fiscal Studies has been digging into the data and come up with some fascinating facts about those at the top if the income ladder. The IFS is undertaking a larger review, the Deaton review, into inequalities. That will look at why some people have such high incomes. Are they benefiting from scarce talent, an ability to innovate or being successful wealth creators, or are they exploiting their market power at the expense of others?
That is for later. In the meantime, we know more about the top 1% than we did.
So, as the IFS points out in its report, The characteristics and incomes of the top 1%, by Robert Joyce, Thomas Pope and Barra Roantree, the top 1% are disproportionately male, middle-aged and based in London. Men constitute 83% of the top 1% and 89% of the top 0.1%, which I shall leave here without comment.
The top 1% has become, like the economy as a whole, more geographically concentrated. Though people in the top 1% - some 310,000 in any given year – can be found in most parts of the country, half are in just 65 (out of 650) parliamentary constituencies, predominantly in London and the southeast. In 2000, half of the very rich were spread over 78 constituencies.
Nationally, to get into the top 1%, a taxable income of £160,000 is required, while nearly £650,000 is needed to make it into the stratosphere of the top 0.1%. The higher the income, the more that it is likely to consist of more than just salary. So a quarter of the incomes of the top 1% are in the form of partnership and dividend income. Roughly a third of them are business owners.
Whether it is possible to keep up with the Joneses depends very much on where you live. A middle-aged man (45-54) in London with an income of £160,000 is in the top 1% nationally but not even in the top 5% among his peer group in the capital. To be in the top 1% in London for a middle-aged man would require an income of £700,000. There is always somebody considerably richer than you.
That may be why people in London and the southeast, particularly higher-income people, are in danger of losing touch with how most of the country lives. As Joyce, a deputy director of the IFS, puts it: “The highest-income people are very over-represented in the country’s south east corner, most of them are men, and many are in their 40s and 50s. This geographic and demographic concentration may be one reason why many of those on high incomes don’t realise quite how much higher their incomes are than the average. “
There is another point that emerges from the research which could be important in the future. It is easy to think of those on the highest incomes as both a privileged group but also an unchanging one. That is not the case.
A quarter of those in the top 1% this year will not be in the group next year and only half will still be at the top in five years’ time. Very few will be in the top 1% all their lives. People have good years and bad years, and they move in and out of the top 1%.
Between 2000-01 and 2015-16, for example, nearly 6% of men born in 1963 found themselves in the top 1% of income earners at some point. That is why, until quite recently, promising to soak the rich with higher taxes was considered to be bad politics. People aspired to be well-off, to make it to the top of the tree, and many did, if only temporarily. Taxing aspiration – and many would favour higher top rates than Labour’s proposed 50% - was considered to be a bad idea.
There is a wider point about the top 1%, which may offer another reason for proceeding with caution. Increasing taxes on the rich is everybody’s favourite way, apart from the rich, to increase revenues and pay for the public services that everybody wants.
Often, however, this is based on the assumption that there is a golden goose sitting there an waiting to be plucked. The figures, however, suggest otherwise.
This is a changing group not a fixed one. It is quite mobile, and probably able to take its talents elsewhere.HMRC figures show a 13% drop in the number of “non-doms” in Britain in the past year, and a drop of 6,000 in so-called high net worth individuals. It is also capable of varying its income and using tax-planning, to minimise its tax liabilities. Tax plans which aim to get a lot more revenues out of the top 1% are almost certain to disappoint.
That does not mean they will not happen. Things have changed from the days when Lord Mandelson could say, on behalf of New Labour, that “we are intensely relaxed about people getting filthy rich, as long as they pay their taxes”
People are no longer so relaxed. Average earnings, in real terms, are still fractionally below the levels prevailing before the financial crisis. And, though they are rising again now, memories of the squeeze are still raw. When a rising tide lifted all boats people were less troubled about very high incomes than they are now.
There is also the strong suspicion, which the IFS is examining, that the rich do not deserve their rewards. . Even the Johnson plan of raising the higher rate threshold was not as popular as he might have expected. Economic arguments against soaking the rich and killing the golden goose have not changed but the politics has moved on.