When discussing tax burdens and redistribution, it is often quoted that the top 1% of earners in the UK contribute 29% of all tax revenues. Whilst this is inaccurate, as this statistic only considers income tax, it is also dangerously misleading. Naturally, a positively skewed distribution, such as income, will result in the richest paying a larger amount of tax, as the mean income figure is larger than the median figure.
However, when delving deeper into the UK’s tax system, it is apparent that the tax burden is not shared in a progressive manner. According to the most recent ONS report, the richest quintile of households spend just 9% of their disposable income on indirect taxes, compared to the poorest fifth of households, who spend 28.3%. The plurality of revenues from indirect taxes came from VAT, which has become particularly harmful to those on lower incomes since the pandemic. As CPI inflation peaked at 11.1%, Value Added Tax on affected goods also increased, hitting the poorest households the hardest, as they spend a larger percentage of their income on VAT.
Another issue with focusing on income tax levels is that not all forms of income and wealth generation are subject to income tax, and these workarounds are usually exclusive to the rich. Whilst the highest rate of income tax in the UK is 45% for any income over £125,140, capital gains tax rates are much lower, between 10% and 28% depending on the nature of the gain. Capital gains are the profit that is made when an asset is sold compared to its original price. Despite the much lower tax rates enjoyed by capital gains, capital gains themselves seem to be reserved for those on higher incomes. According to an LSE and University of Warwick study, earners above £100,000 account for 90% of all taxable gains.
Furthermore, those who have the benefit of choosing how they receive their compensation are more likely to take advantage of tax loopholes. Along with capital gains tax, tax rates on dividends are between 8.75% and 29.5%, much lower than the additional rate of income tax at 45%. People who are employed and paid on a standard salary are less likely to change the way they are paid. Since they are also on much lower salaries than the highest earners, they may not be able to afford their money being frozen in certain investments. However, those on higher incomes, who have a lower marginal propensity to consume, are more likely to be able to afford a restructuring of their compensation. Moreover, business owners and those who live off investments can easily restructure their pay. This results in higher earners paying a much lower rate of tax than expected, as they can take advantage of lower capital gains and dividends tax rates, whilst those who do not have access to such luxuries continue to pay their expected share.
Overall, this imbalance in access to tax loopholes results in a tax system that disproportionately harms those on lower incomes. According to the LSE study, ‘individuals with a total remuneration of £10 million had an effective tax rate of just 21%’. This is less than the expected rate paid by somebody earning £30,000 a year. Addressing the issue of inequitable taxation is central to reducing inequality in British society, as new reforms and ideas must be implemented to reverse the societal divide exacerbated by austerity and the pandemic.
Written by Paul Brady
Produced by Madhav Bhimjiyani
an enlightening read!