During his grilling of Jeremy Corbyn on Tuesday night, Andrew Neil claimed that Labour’s plans to increase taxes on the highest earners would cause the tax base to “crumble”, as the very wealthy – whom, Neil claimed, already pay a disproportionately high level of tax – moved overseas to escape a red tide of socialist redistribution.
“If you take the very richest,” Neil said, “the top 0.1 per cent, these are people earning hundreds of thousands of pounds a year, they pay… 12 per cent of all income tax. It would only take a small number of these people to leave the country, there are only 31,000 of them. Your tax base crumbles.” Income tax is, Neil argued “your single biggest tax stream. And more and more, it’s paid by a few people at the top”.
Many watching would have been surprised to learn that Britain depends so heavily on the social conscience of its billionaires, and doubtless took to the streets of Mayfair in a frenzy of grateful forelock-tugging. But is what Neil says correct?
It is technically correct to say that income tax is the government’s biggest revenue stream, but there are lots of taxes. The three biggest are income tax, which makes up 25 per cent of the government’s income, followed by National Insurance (19 per cent) and VAT (18 per cent). National Insurance is capped, as is council tax, and VAT and the taxes on fuel, alcohol and other items are based on consumption, not the wealth of the payer. It is, therefore, a relatively small area of taxation in which the rich are expected to be more generous.
A study by the Resolution Foundation last year confirmed that when all the other taxes are added into a comparison of how people’s wealth compares to their total tax contributions, the top 10 per cent of earners paid 27 per cent of all tax, and received 31 per cent of all market income. There’s a strong case to say that the rich are favoured, not punished, by the tax system as a whole.
George Turner, the director of Tax watch, explains how this works: “income tax figures don’t count income from capital gains. And that’s a huge distortion… think of all the hedge fund managers and private equity managers, lots of their income comes from capital gains. Think of the way that share bonuses work for highly paid executives – when they’re actually paid the shares, that’s counted as an income, but years later, when they sell their shares, that’s a capital gain. Large parts of the way people get their money are not captured when you just look at income.” And because income tax is progressive, Turner explains, the wealthy are incentivised “to manage their finances in a way which means the money they receive comes through other routes”.
“The classic example of this is the personal services companies that have been controversial at the BBC and other institutions, where people set up a company, and people have their employer contract with the company, and the company then pays them a very low wage – and then they collect their money through dividends and capital gains.”
Tax avoidance is rife in the UK economy. Earlier this year, Arun Advani, an assistant professor at Warwick University, analysed data from self-assessment taxpayers who had been audited by HMRC, and found that a third of people who file tax returns under-report their income. More than three million people should be paying an extra £2,300, on average, but the amount avoided is concentrated at the top; 4 per cent of people owe more than 40 per cent of unpaid tax.
But the wealthy also have a variety of perfectly legal means available to them to make money and avoid paying tax. One of the most significant is the ISA. “You can put £20,000 a year into an ISA”, Turner explains. “You can invest through that ISA wrapper, in a wide variety of investment products, and that’s just not taxable.” The ISA, says Turner, was “designed as a policy to help savers with a few thousand pounds a year”, but has become an investment product that helps millionaires make money tax-free. Turner says the total value of stocks and shares ISAs in 2017-18 was £337bn. At a 5 per cent return, “that’s £16.85bn of income a year which goes uncounted in income inequality statistics.”
It is also important to recognise that wealth and income are not the same thing. In the interview, Neil described the example of a pensioner on a “modest income” from a few investments- “they’ve saved, and they’ve got dividend income of about £2,000”, and who would, under Labour, see a £391-a-year rise in taxes. Corbyn said he “would question that figure”. But what he could have said is that somebody who earns £2,000 a year from dividends needs to have around £40,000 a year in their savings account. He could also have pointed out that with home ownership for retirees at over 75 per cent, this pensioner is likely to have paid off their mortgage. In most cases the “modest” £14,000 a year Neil describes would all be disposable income. “Many people in their 20s and 30s would dream of that level of disposable income,” Turner observes. “People can be wealthy, and have low incomes day to day – and that’s part of the inequality in our society.”
Andrew Neil is not the first to claim that the rich are doing a great job of paying for our public services. In his 2015 budget speech, George Osborne claimed that “those with the broadest shoulders are bearing the greatest burden”. In 2017, Theresa May claimed that “the top 1 per cent of earners in this country are paying 28 per cent of the tax burden”. If you really squint at income tax and ignore the majority of what is happening in the economy, it sounds believable. But it isn’t true, and anybody applying for the job of reshaping Britain’s economy should have been able to articulate that.
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