Are the super-rich paying enough tax?

Probably not.

Robin Hood wouldn’t have approved of the trend in tax policy over recent decades. Taking from the rich to give to everyone else has fallen out of favour, especially in Britain and the US. Since the early 1950s the top rate of income tax has tumbled in the US from above 90 per cent to 35 per cent. And a mix of different types of income means many of the super-rich pay an overall rate less than that. In Britain, too, the levy on the rich has halved since peaking in the 1970s at 83 per cent. And while HMRC reports that the share of total tax paid by the top 1 per cent in the UK has increased since 1999, tough fiscal times mean politicians on both sides of the Atlantic have been casting a covetous eye over the bulging wallets of the wealthy.

While the UK’s Conservative-Liberal coalition recently edged the top rate of income tax down, there have been other proposals to force the rich to contribute more – notably the idea of a higher charge on £1m homes, the so-called mansion tax.

In the US, Barack Obama is seeking re-election on a platform of raising top-rate income tax and imposing a minimum 30 per cent tax on those earning more than $1m a year, a policy originally suggested by billionaire investor Warren Buffett. "This debate is partly about fairness," says Len Burman, professor of practice in public administration and international affairs at Syracuse University and former Treasury official under Bill Clinton. "But there is no right or wrong answer to the question of how much of their money the rich deserve to keep." There are also myths about the dangers of taxing the rich that are often repeated with little evidence to back them up, he argues.

In reality, many economists believe governments can extract more money from their wealthiest citizens without chasing them out of the country or hobbling economic growth. Most clashes on high-end taxes begin with the tricky question of justice. The starting point for this debate is one of necessity. Most governments would like more cash. Government debt held by the public in the US is on track to climb from about two thirds of national income to as high as 100 per cent over the coming decade.

"Levels this high would make America vulnerable to a debt crisis that would make the fallout from the Greek debt crisis look like a picnic," says Bob Williams, an economist at the Tax Policy Center in Washington.

Meanwhile, despite far more active effort to control spending, Britain’s fiscal position still looks precarious. Thrift by the government has been hurting growth, further undermining tax revenues.

"The depressing fact is that cuts in spending won’t be enough to fix public finances," says Joel Slemrod, a tax specialist at the University of Michigan. "Painful as it is, we will need both spending cuts and tax increases."

Many right-leaning experts acknowledge that taxes will need to rise. But they also point out that high earners already pay more than their fair share. To back this up, friends of the rich observe that in recent years the top 1 per cent have paid about a third of all income taxes in the US – an impressive $318bn. (To make it into the 1 per cent club, you need to earn more than $344,000 per year.) On average they handed over roughly 25 per cent of their income to the taxman. By contrast the bottom half of American earners chipped in just 2.3 per cent of income taxes and were taxed at an average rate of just 1.8 per cent. Close to half of Americans pay no income tax at all.

Rich Brits aren’t far behind. The top 1 per cent shoulder a full quarter of Britain’s total income tax burden. Still, these figures tell only half of the story. As Occupy protestors never tire of saying, the rich have secured a bigger share of the national pie. As a result higher tax rates would merely be clawing back part of the outsized gains in income the wealthy have claimed over the past few decades. In 1970 the wealthiest 1 per cent of Americans took home just 9 per cent of the nation’s total income. Now that is closer to 24 per cent – the highest level since 1928.

Even if America doubled the effective tax rate on the top 1 per cent this golden group would still have an after-tax income twice as high as in 1970 in real terms, according to Professor Emmanuel Saez, an economist at the University of Berkeley. Income gaps have widened in the UK too.

Public anger is also roused by the fact that some of the super-rich pay an extremely low tax rate indeed. This may be a small minority but they attract a lot of attention. In an announcement to accompany his Buffett tax plan, President Obama disclosed that 22,000 households that made more than $1m per year paid less than 15 per cent of their income in tax – and 1,470 managed to pay no federal income tax at all, according to figures for 2009 from the Internal Revenue Service.

Mitt Romney, the Republican presidential nominee, paid 15 per cent tax on his $21m income partly because his money comes from investment dividends, in a form of payment known as "carried interest", which attracts a lower tax to reward risk taking. He also donates money to charity, which would further reduce his tax liability. America also offers a 15 per cent tax rate to hedge fund managers on fees they get for investing other people’s money. 

Squeeze the rich?

A similar case can be made in the UK. Research by the Treasury showed that about 550 people earning more than £1m a year were paying a lower average tax rate than those with an annual income of £20,000. Some 330 of these super-high-income Brits were managing to get away with a tax rate of less than 10 per cent.

So there is an argument in favour of both sides of the fairness debate. But assuming politicians will have to levy higher taxes on the rich, it is worth asking how this can best be done.

For decades, right-wing economic theorists have offered dire warnings about the consequence of trying to squeeze the rich. The first line of defence is that the rich will simply manage to avoid the tax. Second, in grabbing more from the rich, governments actively retard economic growth. That leaves everyone worse off. "These theories are intuitively appealing," says Williams at the Tax Policy Center. "But the evidence that this happens in practice is not terribly compelling." 

Take the idea that government revenues actually decline as tax rates rise. In 1974, economist Arthur Laffer impressed US President Gerald Ford and advisers Donald Rumsfeld and Dick Cheney by demonstrating how higher taxes could actually reduce tax revenue. The theory behind the famous Laffer curve – first drawn on a cocktail napkin for the president – is that tax hikes encourage the rich to work less, find more creative ways to evade taxes and postpone or scrap investments. As marginal tax rates move close to 100 per cent, government revenues would actually fall to zero.

Fans of Laffer claim that the celebrated curve was recently put to the test in the UK – and passed with flying colours. Eager for revenue, the Labour government raised the top rate of tax from 40 per cent to 50 per cent in 2010. While revenue didn’t actually fall, it didn’t rise much either. Affluent Brits found various ways to avoid the hike. Bankers asked for bonuses to be paid before the tax came into effect. After the tax came into force, others asked for income to be delayed in the hope that Labour would be replaced by the Conservative Party. Some even moved overseas.

Some would argue Britain was not an entirely fair test. Many tax avoidance strategies relied on delaying tactics. Had the tax remained in place for longer it would have been harder to avoid. There is also plenty of heavy-hitting economic research that shows higher tax rates can deliver more government revenue, especially if the tax code is simplified to reduce avoidance.

Professor Saez and Peter Diamond, the Nobel Prize-winning economist, published a paper in November 2011 concluding that even without closing tax loopholes, top tax rates in the US could be pushed as high as 48 per cent without falling foul of the Laffer curve of declining revenues. If the tax loopholes were removed, the rates could go up to 76 per cent.

Saez helpfully estimates that a tax of 67 per cent on the top 1 per cent would actually raise $4trn over the coming decade – far from enough to close the deficit but a very big step along the way. The common assumption that higher taxation – especially on the rich – slows the economy has even less foundation. Start with a geographical comparison. Many countries around the world tax at far higher levels than Britain or the US and achieve similar rates of growth. The Swedish government, for example, claims 53 per cent of GDP in tax – far higher than the 32 per cent collected by the government in the US, even including state and local authorities. And while it’s true other factors may have played a part, the nation’s economy has outpaced that of the US over the past decade. In fact Anglo-Saxon nations have not grown faster than countries that ignored Laffer’s advice, including Germany and Denmark. 

A time-based comparison goes against defenders of the rich too. There has been no noticeable acceleration of growth in the US or UK as their governments have gone about pruning the top rates of tax.

"In fact the US economy grew very swiftly in the 1950s and 1960s, when top rates of tax were draconian by current standards," observes Mark Weisbrot, the co-director of the Center for Economic and Policy Research in Washington. Professors Diamond and Saez contend that this is because a lot of what the rich do does little to promote economic growth – a claim that many on the right will dispute. So this leaves the question of how best to tax the rich. Buffett’s tax, which sets a 30 per cent floor under the tax rate of those earning more than $1m, makes for gratifying politics.

Sadly, this type of approach can cause policymakers real headaches (witness the charity tax in the UK) and would raise pocket change in budgetary terms, about $47bn over 10 years, compared with expected federal revenues of $41trn. 

Leak tragedy

There is a way of taxing the rich that will yield far more revenue and be much harder to avoid: plugging leaks in the tax code. "The US tax code is riddled with loopholes that the rich can exploit," says Professor Burman. "And many of these deductions are skewed to benefit the rich."

One example is the mortgage interest tax deduction, which allowed Americans to exclude from their income payments on home loans of up to $1m. This disproportionately benefits the rich. Those in a 35 per cent tax bracket will save $35 for every $100 of mortgage interest. Those in the humbler 15 per cent tax bracket save just $15 per $100 on what is likely a lower interest payment. Scrapping this deduction could raise $80bn a year – 20 times more than the Buffett tax over 10 years. Even capping deductions at a lower rate could garner impressive sums. And other policies benefit the wealthy, including a deduction on state income tax. A bolder move in the US would be to tax investment income at the same rate as income.

"Among the main reasons the rich pay less is the privileged treatment of investment over sweat and toil," says Dr Weisbrot. Equalising the two could yield enough to scrap corporate income tax, which is really a form of double taxation on profits. "The best way to ensure the rich pay more is to simplify the tax code," says Professor Burman. "You can even have lower rates and yet raise more money." 

Of course, soaking the rich won’t solve the fiscal problems of Britain or the US. One study by the Tax Policy Center showed that if policymakers tried to rely on top taxpayers alone to bring down the deficit to 3 per cent of GDP, the highest rate would need to rise over 90 per cent.

Few believe this is practical or desirable. Instead the pain will have to be more evenly spread throughout society. But on both sides of the Atlantic there is a compelling case for demanding a bigger contribution from the super rich.

This article originally appeared in Economia.

Photograph: Getty Images

Christopher Alkan

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Clive Lewis interview: I don't want to be seen as a future Labour leader

The shadow business secretary on his career prospects, working with the SNP and Ukip, and why he didn't punch a wall. 

“Lewis for leader!” Labour MP Gareth Thomas mischievously interjects minutes after my interview with Clive Lewis begins. The shadow business secretary has only been in parliament for 18 months but is already the bookmakers’ favourite to succeed Jeremy Corbyn. His self-assuredness, media performances and left-wing stances (he backed Corbyn in 2015 and again this year) have led many to identify him as Labour’s coming man.

On 19 September, I met Lewis - crop-haired, slim and wearing his trademark tweed jacket - in Westminster's Portcullis House. He conceded that he was flattered by the attention (“It’s lovely to hear”) but was wary of the mantle bestowed on him. “This place has lots of ex-would-be leaders, it’s littered with them. I don’t want to be one of those ex-would-be leaders,” the Norwich South MP told me. “I don’t want a big fat target on my head. I don’t want to cause the resentment of my colleagues by being some upstart that’s been here 18 months and then thinks they can be leader ... I’ve never asked for that. All I want to do is do my job and do it to the best of my ability.”

But he did not rule out standing in the future: “I think that anyone who comes into this place wants to do what’s best for the party and what’s best for the country - in any way that they can.”

Lewis, who is 45, was appointed to his current position in Labour’s recent reshuffle having previously held the defence brief. His time in that role was marked by a feud over Trident. Minutes before he delivered his party conference speech, the former soldier was informed that a line committing Labour to the project’s renewal had been removed by Corbyn’s office. Such was Lewis’s annoyance that he was said to have punched a wall after leaving the stage.

“I punched no walls,” he told me a month on from the speech. “Some people said to me ‘why don’t you just play along with it?’ Well, first of all it’s not true. And secondly, I am not prepared to allow myself to be associated with violent actions because it’s all too easy as a black man to be stereotyped as violent and angry - and I’m not. I’m not a violent person. Yes, it’s a bit of fun now, but very quickly certain elements of the media can begin to build up an image, a perception, a frame ... There’s a world of difference between violently punching a wall and being annoyed.”

Lewis said that he was “happy with” the speech he gave and that “you’re always going to have negotiation on lines”. The problem, he added, was “the timing”. But though the intervention frustrated Lewis, it improved his standing among Labour MPs who hailed him as the pragmatic face of Corbynism. His subsequent move to business was regarded by some as a punishment. “Do I think there was an ulterior motive? I’ll never know,” Lewis told me. “I’m confident that that the reason I was moved, what I was told, is that they wanted me to be able to take on a big portfolio”.

Nia Griffith, his successor as shadow defence secretary, has since announced that the party will support Trident renewal in its manifesto despite its leader’s unilateralism. “Jeremy Corbyn deserves credit for that,” Lewis said. “I think everyone understands that Jeremy’s position hasn’t changed. Jeremy still believes in unilateral disarmament, that is his modus operandi, that’s how he rolls and that’s one of the reasons why he is leader of the Labour Party ... But he’s also a democrat and he’s also a pragmatist, despite what people say.”

Lewis, himself a long-standing opponent of Trident, added: “You need a Labour government to ensure that we can put those nuclear missiles on the table and to begin to get rid of them on a global scale.”

He also affirmed his support for Nato, an institution which at times Corbyn has suggested should be disbanded. “The values that underpin Nato are social democratic values: liberty, democracy, freedom of expression. Let’s not forget, it was Clement Attlee and the New Deal Democrats that initiated and set up Nato. It’s about being in it to win it, it’s about winning the arguments inside Nato and making sure that it’s a force for good. Some people would say that’s impossible. I say you’ve got to be in it to be able to make those changes.”


Clive Anthony Lewis was born on 11 September 1971 and grew up on a council estate in Northampton. It was his Afro-Caribbean father, a factory worker and trade union official, who drew him to politics. “My dad always used to say “The Labour Party has fought for us, it’s really important that you understand that. What you have, the opportunities that working people and black people have, is down to the fact that people fought before you and continue to fight.”

After becoming the first in his family to attend university (reading economics at Bradford) he was elected student union president and vice president of the NUS. Lewis then spent a decade as a BBC TV news reporter and also became an army reservist, serving a tour of duty of Afghanistan in 2009. He was inspired to enlist by his grandfather. “He fought in Normandy in the Second World War and I used to go back over with him and see the camaraderie with the old paras ... Whatever people’s views of the armed forces, that’s one thing that no one can take away, they generate such friendships, such a bond of union”.

Lewis told me that his time in the military complemented, rather than contradicted, his politics. “I think many of the virtues and values of the army are very similar to the virtues and values of socialism, of the Labour Party. It’s about looking out for each other, it’s about working as a team, it’s about understanding. The worst insult I remember in the army is ‘jack bastard’. What that said was that you basically put yourself before the team, you’ve been selfish”.

He added: “People have to remember that the armed forces do as democratically elected governments tell them to do. They don’t arbitrarily go into countries and kick off. These are decisions that are made by our politicians.”

After returning from service in Helmand province, he suffered from depression. “I met guys who had lost friends, seen horrible things and they had ghost eyes, dead eyes, it’s the only way I can describe it. People that I saw had far more reason to have depression or worse. Part of my negative feedback loop was the fact that I felt increasingly guilty about being depressed because I didn’t feel that I had the right to be depressed because I knew people who’d seen far worse ...  I’m now told that is quite common but that doesn’t make it any easier.”

Lewis added: “It makes you realise that when the armed forces go abroad, when they do serve on our behalf, what they do, what they go through, that’s not something that anyone can take away from them.”

In May 2015, he was one of a raft of left-wing MPs (Richard Burgon, Rebecca Long-Bailey, Kate Osamor, Cat Smith) to enter parliament and back Corbyn’s leadership bid. As shadow business secretary, he believes that Brexit and Theresa May’s economic interventionism offer political openings for Labour. “I feel debate is moving onto natural Labour territory. But not the Labour territory of the 1970s, not picking winners territory. It’s moving to a territory that many on the left have long argued for, about having a muscular, brave, entrepreneurial state which can work in partnership with business”.

He added: “We can say we’re the party of business. But not business as usual ...  I think there are lots of people now, and businesses, who will be aghast at the shambles, the seeming direction we seem to be going in.

“The British people have spoken, they said they wanted to take back control, we have to respect that. But they didn’t vote to trash the economy, they didn’t vote for their jobs to disintegrate, they didn’t vote to see their businesses decimated, they didn’t vote to see a run on the pound, they didn’t vote for high levels of inflation.”

On the day we met, an Ipsos MORI poll put the Tories 18 points ahead of Labour (a subsequent YouGov survey has them 16 ahead). “I’m not too spooked by the polls at the moment,” Lewis told me when I mentioned the apocalyptic figures (he has a potentially vulnerable majority of 7,654). “Nobody wants to be where we are but I’m quite clear that once we get up a head of steam we’ll begin to see that narrow. I definitely don’t have any doubts about that, it will begin to narrow.”

Lewis is a long-standing advocate of proportional representation and of a “progressive alliance”. He told me that Labour, the Liberal Democrats and the Green Party should have fielded a single pro-European candidate in the recent Witney by-election (which the Conservatives won with a reduced majority) and that he was open to working with the SNP.

“There are lots of people, including the Scottish Labour Party, who are aghast that you can say that. I think it has to be put out there. I want to see a revival of Scottish Labour but we also have to be realistic about where they are, the time scale and timeframe of them coming back.

“I’m not talking them down, I’m simply saying that we want to see a Labour government in Westminster and that means asking some hard questions about how we’re going to achieve that, especially if the boundary changes come in ... If that means working with the SNP then we have to look at that.”

Even more strikingly, he suggested that Labour had to “think about talking to parties like Ukip to try and get over that finishing line.”

Lewis explained: “If Ukip survive as a political force these coming weeks and months they’re obviously pro-PR as well. I despise much of what Ukip stand for, it’s anathema to me, but I also understand that it could be the difference between changing our electoral system or not ... These are things that some people find deeply offensive but I’ve not come into politics to duck the tough issues." 

He praised Corbyn for “having won” the argument over austerity, for his “dignified” apology over the Iraq war and for putting Labour in surplus (owing to its near-tripled membership of 550,000).

“History will show that Jeremy Corbyn was someone who came in at a time when politics was tired, people were losing faith in it, especially people who come from the progressive side of politics.

“Whatever people think of Jeremy’s style, whatever they think of his leadership, whatever they think of him personally, you can’t take that away from him. He’s revived politics in a way that we haven’t seen in this country for a long time. I know he’s got his doubters and detractors but I think ultimately he’s made our party in many ways stronger than it was a year ago.”

I asked Lewis whether he expected Corbyn to lead Labour into the next general election. “Yes, I do. And I think it depends when that general election is. If it’s next year then most certainly.

“If it’s 2020? That’s a question for Jeremy. I think, as I understand it, he is going to but I don’t know the inside of his mind, I don’t know what he’s thinking. I haven’t heard anything to suggest that he has anything other than the intention to lead us into a general election and to become prime minister.”

Of his own prospects, he remained equanimous. “Always be wary of Greeks bearing gifts. It’s lovely to hear but I know my own fallibilities and weaknesses.

“I haven’t come from a background where I’ve had it imbued in me from an early age that I’m destined to lead or to rule. I don’t have that arrogant self-belief, the sense of entitlement that it’s coming my way or should do. I can’t believe I’m in the House of Commons and I can’t believe that I’m shadow business secretary. I still pinch myself. That’s enough for me at the moment, it really is. That’s the honest truth.”

George Eaton is political editor of the New Statesman.