Where the tax burden falls

Where does the tax burden fall, and why do loopholes help the rich?

The TPA's Matthew Sinclair has produced an interesting graph from HMRC's data on the share of income, which charts clearly what it means to have a progressive taxation system (click for big, and note that the top four categories are equal in size to one of the other four; the top 25 per cent has been split up to better show the progressive nature of the system):

Mulling over Osborne's tycoon tax, Sinclair provides an example of a tax "loophole" which he thinks is anything but – loss relief:

Suppose you make a £15 million loss one year, then enjoy a £15 million income the next year. How much have you made overall? £0. If you get full loss relief then you will be taxed on that basis and pay nothing, as you have no income to pay from. If your loss relief is capped at 25 per cent of your income, as the Government seems to be proposing, then you presumably have to pay tax on over £10 million. From an income of £0. Good luck.

It is difficult to argue with the ideal of loss relief; people shouldn't be penalised by being taxed exorbitantly on multiple years' income just because they happen to receive the actual payment in one lump sum. But the existence of loss relief is also a wonderful example of a tax system built with one set of rules for the rich, and another set for everyone else.

Suppose a different pattern of income: You are a novelist working for £10,000 a year, barely supporting yourself while you write on the evenings and weekends. (For simplicity's sake, lets set this in 2015 when the 10k tax threshold is in effect). After five years, your book takes off, and you earn a quarter of a million in a year. Not only are you paying income tax for the first time in your life, you are straight in at the top rate.

In this situation, can you claim tax relief? Of course not. You pay your tax for the year your income comes in, and if you took a hit in earlier years, that's something you have to suck up. Yet if that quarter of a million had been spread out over the five years before, you would have paid at least £50,000 less in tax.

It's easy to see why this isn't the case. It would be hell to administer, and would basically end up with everyone paying tax on their average lifetime earnings. Yet this awkwardness results in a tax system which allows relief for those who are in a position to gamble millions on a business, but not those who can only gamble thousands on a career. It's a pattern repeated throughout the tax system, but as we've seen with the charity debacle, while these loopholes are used, they will be very hard indeed to close.

The BP board, 1960. These gentlemen are probably the 1%. Credit: Getty

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty
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Gordon Brown contemplated making Alastair Campbell a minister

The move is revealed in Ed Balls' new book.

Gordon Brown contemplated making Alastair Campbell, a sports minister. Campbell had served as Tony Blair’s press chief from 1994 to 2003, Ed Balls has revealed.

Although the move fell through, Campbell would have been one of a number of high-profile ministerial appointments, usually through the Lords, made by Brown during his tenure at 10 Downing Street.

Other unusual appointments included the so-called “Goats” appointed in 2007, part of what Brown dubbed “the government of all the talents”, in which Ara Darzi, a respected surgeon, Mark Malloch-Brown, formerly a United Nations diplomat,  Alan West, a former admiral, Paul Myners, a  successful businessman, and Digby Jones, former director-general of the CBI, took ministerial posts and seats in the Lords. While Darzi, West and Myners were seen as successes on Whitehall, Jones quit the government after a year and became a vocal critic of both Brown’s successors as Labour leader, Ed Miliband and Jeremy Corbyn.

The story is revealed in Ed Balls’ new book, Speaking Out, a record of his time as a backroom adviser and later Cabinet and shadow cabinet minister until the loss of his seat in May 2015. It is published 6 September.