Squeezing the Rich

It’s hard to avoid the subject of tax these days, and in particular who should be paying what.  On one side of the argument high taxes on the wealthy are seen as essential to address the issue of inequality in society, on the other side of the argument high taxes are claimed to discourage talent and the entrepreneurial spirit and (if taken to extreme) result in less tax being collected as the wealthy leave.

And the argument isn’t just theoretical.  A recent Institute for Fiscal Studies report points out that the UK economy faces a multi-billion pound fall in tax revenues in the near future from cars being more fuel efficient, people smoking less and North sea oil and gas revenues depleting.  Meanwhile the politically popular process of reducing the tax burden on the low paid leaves a further tax shortfall that must somehow be dealt with.

So what will a future government (whichever one is in power) do?  There are few alternatives.  Reduce spending further, devise new taxes or increase existing tax levels and this last choice can really only mean one thing; increase taxes on the wealthy.  But it must be wondered how much more can be collected from this source.  The top 1% of earners earn 13.7% of all income and pay 29.8% of all income tax (this up from 11% and 21.3% a decade ago). Just 300,000 people now pay income tax and NI that amounts to 7.5% of ALL tax collected in the UK.  If significant numbers of these people leave then there really will be a problem.

Which brings into play an interesting paradox.  If it proves impossible to get a greater proportion of what the wealthy earn, then the only solution might be to accept that the wealthy need to earn even more so that what they pay in tax also increases. In other words, inequality needs to be encouraged, so that the very wealthy can continue to subsidise the rest of us.

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