FEATURED ARTICLE by SIMON JENKINS
Blaming Britain’s lack of growth on the taxation of high earners is nonsense – and totally out of step with the rest of the world
I know very few rich people who got rich to make money. They got rich because, other than spivs and gamblers, they enjoyed their work and were good at it. How much they made might be due to competition, greed, love, prestige, personal rivalry or, as JK Galbraith said of senior executives, a “warm personal gesture by an individual to himself”. But there is no evidence that output rises or falls in response to shifts in post-tax income, except for some hourly-paid workers. It therefore does not respond to changes in marginal income tax.
While a few obsessives may so hate paying taxes that they would rather live out their lives in an airport lounge, the differential impact on economic growth of this year’s rise from 40p to 50p on incomes over £150,000 must be negligible. So why all this week’s talk of abandoning the 50p rate?
When Margaret Thatcher’s government first cut the top rate from 83p to 60p in 1979, the rich thought they had gone to heaven. When in 1988 Nigel Lawson planned to cut it to 40p, Thatcher, according to her biographer, “privately had her doubts and would have settled for 50%”. While it is at the upper end of the European scale, most of Europe’s rich pay far higher local taxes than the British.
The truth of the matter is that Britain’s rich have got very rich indeed, and continue to do so through the recession. Over the past decade, the stock market valuation of the FTSE 100 has declined 25%, while relevant executives’ pay has risen 85% in real terms and bonuses 350%.
These executives earned 47 times median earnings in 2000 and 88 times last year. The Blair-Brown bubble economy did not trickle down, it trickled up. The overwhelming majority of high earners were in the financial sector, where those who have survived gave themselves £14bn in bonuses last year, money that hard-pressed bank shareholders might reasonably claim belonged to them.
Whenever 20 economists put their name to a letter it is a near certainty that nonsense is being perpetrated. Wednesday’s letter in the Financial Times opposing the 50p tax rate claimed that it would “punish wealth creation” and deter foreigners, and thus be “against the interests even of ordinary workers”.
No evidence was given for abstract assertions about what incentivises new businesses and helps companies expand. Even back in the 1980s a Treasury study could find no disincentive in income tax. As many worked harder when taxes rose so as to maintain net income as worked less hard out of frustration. All evidence is anecdotal, usually of “a friend thinking of moving abroad”.
When the glaring need of the economy is for a stimulus to demand, it is bizarre to blame lack of growth on the taxation of the rich – as bizarre as the Tories’ other culprit, a shortage of rural development land. Besides, the new tax falls overwhelmingly on high earners in the financial sector, whose reckless “entrepreneurship” in the past has so crippled Britain’s prosperity. Whatever else might be said for London’s “wild west” financial sector in the 40p tax era, it did nothing to build a stronger national economy. It is hard to think of a less deserving bunch of wealth accumulators.
The 20 economists flatly contradict recent views expressed by a galaxy of the world’s richest people. Those arguing for higher taxes on themselves include America’s Warren Buffett, France’s Liliane Bettencourt, the Italian boss of Ferrari and 50 German “tax-me-harder” tycoons. The last issued a manifesto pleading that “something needs to be done to stop the gap between rich and poor getting even bigger”, and suggested a two-year 5% wealth tax. France has been considering a 3% surcharge on earnings over €500,000, and Spain is considering a return to a wealth tax.
The politics of all this is clear. The Tories want to toss some token of comfort to their core voters, though there cannot be many earning over £150,000. Yet when the rich are getting richer and average families have just been hit by £450 a year in higher VAT, it seems politically mad to cut an estimated £2.7bn from taxes on the richest 1%.
The chancellor keeps saying he will crack down on bonuses and stamp out tax avoidance. He may have begun to recoup some of the estimated £80bn the avoiders have reportedly stashed away in tax havens, which astonishingly still include colonies of the crown. But if he really has billions to burn, economics says that in a recession he should give it to those most likely to spend, rather than those more likely to save or invest in unproductive property.
Meanwhile there are other ways of taxing the rich that have specific social benefits. The obvious candidate is the one tax that has been in steady decline over the past quarter century, and that is on property. This fiscal Cinderella, once called rates and now council tax, has been hated by chancellors down the ages, largely because it is not collected and controlled by them.
The decline of local property taxes from 12% of total revenue in the 1980s to under 5% today – largely replaced by VAT – has been so stark that some councils, such as Westminster, now get more revenue from the owners of cars (in parking and in fines) than they get from buildings. The banded council tax has degenerated to being almost the poll tax that it replaced, since there is only a one-to-three ratio between band A and band H. The top band is all houses that were valued at above £320,000 in 1991. Sheer political cowardice has prevented either revaluation or the introduction of higher bands (other than in gutsy Wales).
The Liberal Democrat Vince Cable made a stab at reinvigorating property as a revenue source two years ago, with his ham-fisted“mansion tax” of 1% on houses worth over £2m. He was shot down on all sides. It would have been far simpler, and more honest, just to revive the old rates, perhaps by increasing the number of council tax bands to reflect a wider spread of house values, and with automatic revaluation. Every year council tax gets more regressive, and the rich get away with fiscal murder.
Throughout Europe and America property and local business taxes form part of the revenue mix. In smart New England they can be as high as $20,000 a year. They tax wealth modestly and they tax the nation’s scarcest resource, living space. As such they are an incentive to the fairer allocation of housing in both public and private sectors.
Property taxes cannot be evaded, and properly imposed are a fair generator of government revenue. Better, they are traditionally paid in anger. Any tax paid in anger is a good tax – the opposite of a stealth tax, because the payer demands to know how it is spent. Property taxes are thus a spur to democratic interest and activity. That, of course, is why politicians detest them.