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.

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The economic and moral case for global open borders

Few politicians are prepared to back a policy of free movement everywhere. Perhaps they should. 

Across the world, borders are being closed, not opened. In the US, Donald Trump has vowed to halve immigration to 500,000 and to cap the number of refugees at 50,000. In the UK, the Conservative government has reaffirmed its pledge to end free movement after Brexit is concluded. In Europe, Hungary, Poland and the Czech Republic are being sued by the EU for refusing to accept a mandatory share of refugees.

Even Jeremy Corbyn’s Labour Party has followed the rightward drift. Its general election manifesto promised to end free movement, and Corbyn recently complained of the “wholesale importation of underpaid workers from central Europe”.

Among economists, however, a diametrically opposed conversation prevails. They argue that rather than limiting free movement, leaders should expand it: from Europe to the world. Michael Clemens, a senior fellow at the Center for Global Development, likens the present system to leaving “trillion-dollar bills on the sidewalk”.

Economists estimate that allowing migrants to move to any country they choose would increase global GDP by between 67 and 147 per cent. A doubling of GDP (a $78trn increase) would correspond to 23 years of growth at 3 per cent. By contrast, the International Monetary Fund estimates that permitting the entirely free movement of capital would add a mere $65bn.

The moral case for open borders is similarly persuasive. As the Dutch historian Rutger Bregman writes in his recent book Utopia for Realists: “Borders are the single biggest cause of discrimination in all of world history. Inequality gaps between people living in the same country are nothing in comparison to those between separated global citizenries.” An unskilled Mexican worker who migrates to the US would raise their pay by around 150 per cent; an unskilled Nigerian by more than 1,000 per cent.

In his epochal 1971 work A Theory of Justice, the American philosopher John Rawls imagined individuals behind a “veil of ignorance”, knowing nothing of their talents, their wealth or their class. It follows, he argued, that they would choose an economic system in which inequalities are permitted only if they benefit the most disadvantaged. The risk of being penalised is too great to do otherwise. By the same logic, one could argue that, ignorant of their fortunes, individuals would favour a world of open borders in which birth does not determine destiny.

Yet beyond Rawls’s “original position”, the real-world obstacles to free movement are immense. Voters worry that migrants will depress their wages, take their jobs, burden the welfare state, increase crime and commit terrorism. The problem is worsened by demagogic politicians who seek to exploit such fears.

But research shows that host countries gain, rather than lose, from immigration. Migrants are usually younger and healthier than their domestic counterparts and contribute far more in tax revenue than they claim in benefits. Rather than merely “taking” jobs, migrants and their children create them (Steve Jobs, the son of a Syrian immigrant, is one example). In the US, newcomers are only a fifth as likely to be imprisoned as the native born. A Warwick University study of migration flows between 145 countries found that immigration helped to reduce terrorism by promoting economic development.

In a world of open borders, the right to move need not be an unqualified one (the pollster Gallup found that 630 million people – 13 per cent of the global population – would migrate permanently). Under the EU’s free movement system, migrants must prove after three months that they are working (employed or self-employed), a registered student, or have “sufficient resources” (savings or a pension) to support themselves and not be “a burden on the benefits system” – conditions that the UK, ironically, has never applied.

But so radical does the proposal sound that few politicians are prepared to give voice to it. An exception is the shadow chancellor, John McDonnell, who argued in 2016: “Inevitably, in this century, we will have open borders. We are seeing it in Europe already. The movement of peoples across the globe will mean that borders are almost going to become irrelevant by the end of this century, so we should be preparing for that and explaining why people move.”

At present, in a supposed era of opportunity, only 3 per cent of the global population live outside the country of their birth. As politicians contrive to ensure even fewer are able to do so, the case for free movement must be made anew.

George Eaton is political editor of the New Statesman.

This article first appeared in the 17 August 2017 issue of the New Statesman, Trump goes nuclear