George Osborne holds freshly minted coins during a visit to the Royal Mint in Llantrisant, Wales on March 25, 2014. Photograph: Getty Images.
Show Hide image

The public want a more progressive tax system - and they're right

Ninety six per cent of people support a fairer system, with the richest paying more than double the poorest.

Tax is a regular area of public and political debate in the UK. Who pays what, who avoids tax, and whether tax is "fair" are questions that are regularly tackled in our press and in Parliament. But much of this debate is shrouded in misinformation, half-truths and downright lies. When people make bold commitments to lift the "low-paid out of tax" for example, or "ensure those on the national minimum wage pay no tax" they rarely mean it. What they actually mean, more often than not, is to lift people out of paying income tax. This may sound like semantics, but there is a rather important difference.

Alongside commitments to lift the poor out of paying tax, we also occasionally hear wild claims made about how "the richest 1 per cent pay 30 per cent of all taxes". A good headline no doubt, but unfortunately, complete nonsense. Again, the richest 1 per cent pays about 30 per cent of all income tax. That is, they pay 30 per cent of a tax that accounts for only 27 per cent of all taxes. The problem with such comments isn't just that they are plainly wrong, it is that they distort the debate and skew public perceptions of our tax system towards sympathy for a supposedly overburdened, hard-working "elite", punished for their success by high taxes. At the other end, we're led to believe that the poorest pay little enough tax so that it is a simple move to lift them out of tax altogether. 

New research from the Equality Trust shows just how misleading these sorts of statements are, and just how far they take us from the truth of what the richest and poorest are taxed. Analysis of ONS data shows that  when all taxes are taken into account, the poorest 10 per cent of households actually pay 23 per cent more of their income in taxes than the richest 10 per cent of households. In fact, they pay a huge 43 per cent, whereas the richest pay just 35 per cent:  the same as the average household. 

But public understanding of how much others in society are taxed is now wafer thin. Polling conducted by Ipsos MORI in partnership with the Equality Trust found that nearly seven in ten (68 per cent) people actually believe the richest 10 per cent of households pay more of their income in tax than the poorest 10 per cent. Particularly shocking is the fact that on average the public under-estimates what the poorest 10 per cent pay in tax by 19 percentage points, believing they pay just 24 per cent of their income in taxes.

This lack of understanding is more shocking when we see just how little support there is for our regressive tax system. Further polling found that 96 per cent of people believe that the tax system should be more progressive than is currently the case. On average, people believe the poorest 10 per cent of households should be taxed just 15 per cent of their income, 28 percentage points less than they currently are. They believe the richest 10 per cent should be taxed 39 per cent, or 4 percentage points more that they are. On average they believe the richest should be pay more more than double the total tax rate of the poorest.

Even more interesting is the fact that although there are some small fluctuations, there is majority support for a more progressive tax system across political party lines, gender, age and even income groups. 

It is true that the poorest 10 per cent of households contains those that are unemployed, as well as students and other people who receive various welfare payments. But while we often hear about how much the "lazy" and "indolent" undeserving poor receive in government payments, we rarely hear about how much of that money is then clawed back. 

Our report "Unfair and Unclear" shows just how far our current tax system is from the public's preferences on how much people should be taxed. Moreover, when looking at the richest and poorest 10 per cent of households, the system is in fact hopelessly regressive. So what can we do about it? There are number of sensible approaches that have so far been resisted by most policy makers and politicians. The first it to tackle our absurdly regressive council tax by transforming it into a progressive property tax, by re-evaluating properties and creating new bands with higher rates for higher value properties. The second is to raise the upper limit of National Insurance Contributions to ensure that the tax is progressive across all deciles. We would also expect to see Government aim to reduce VAT when it has a budget surplus, at the very least. More importantly, we are calling on all parties seeking to form the government from 2015 to commit to the principle that any changes in tax policy are progressive.

Tax plays a hugely important role in people’s lives. It can determine the affordability of basic necessities like food and household bills, but it can also determine the quality of local services, healthcare and education. It is important that people are aware of who pays tax and how much, but equally we must build a tax system that better acknowledges the values of the vast majority of the electorate.  The gap between public perceptions, preferences and reality when it comes to our tax system should be of deep concern to politicians of all hues. Building a system that is fit for a fair society must now be a priority.

Duncan Exley is the director of the Equality Trust

Getty
Show Hide image

We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?