Fact check: are Britain’s wealthiest really paying just 20 per cent tax?
Since the turn of the century the share of income tax paid by the 1 per cent with the highest incomes has risen from 21 per cent to 30 per cent. Despite this, some academics claim that the rich avoid tax. A study released last week is a case in point. ‘Wealthiest in Britain paying just 20 per cent tax rate,’ said the Independent. A fair summary: the London School of Economics and Warwick University did indeed argue that the ‘average person with total remuneration of £10 million had an effective tax rate of just 21 per cent: less than the rate that would be paid by someone on median earnings of £30,000.’ Since they’re supposed to be paying 47 per cent, it’s surprising. So how was this figure arrived at?
There are two elements in their calculation. First: that the rich use tax reliefs to lower their burden. This happens but – crucially – in virtually every case this happens by paying part of their incomes to something deemed to be useful by governments. By far the biggest tax relief is for pensions, costing an estimated £21 billion 2019/20. The rationale for this pensions relief is simple: it will be taxed on the way out of the pension pot, not on the way in. The tax is deferred – not dodged. The LSE/Warwick study simply fails to allow for the fact that the money put into a pension is taxed when the pension is paid.
Other tax reliefs are generally for investment schemes like EIS schemes. While the taxes are relieved initially, incomes arising from the investments are taxed. Again: it’s tax deferred. Not tax avoided. But the LSE/Warwick methodology treats the schemes as if the incomes from the investments were untaxed.
Thirdly, tax relief for charitable donations. Obviously, relief is given: the argument is that the government should go easy taxing what is given to charity. But it is peculiar economics to present this as some kind of selfish saving by the tax-dodging rich.
Other techniques are deployed. The authors claim, for example, that the top rate of taxation of dividends is only 38.1 per cent. This ignores the fact that the income paid out in dividends has already been subject to mainstream corporation tax. The actual tax rate paid depends on circumstances, but for those companies paying normal corporate tax the marginal rate is now 49.8 per cent. This hefty rate is one why entrepreneurs are discouraged from paying themselves in dividends. The tax break does not exist.
But all of these tax breaks, put together, only reduce the ‘apparent’ tax rate to 40 per cent, down from 47 per cent. So how did they arrive at an effective tax rate of 21 per cent? By creating a new concept ‘remuneration’ which is the sum of income earned and capital gains.
Incomes are essentially regular and received annually. Capital gains are irregular and received sporadically: if you sell an investment or, perhaps, your company. This often reflect yields over a long period ploughed back into businesses. Currently taxable capital gains are not indexed for inflation.