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 Images.
Show Hide image

Why relations between Theresa May and Philip Hammond became tense so quickly

The political imperative of controlling immigration is clashing with the economic imperative of maintaining growth. 

There is no relationship in government more important than that between the prime minister and the chancellor. When Theresa May entered No.10, she chose Philip Hammond, a dependable technocrat and long-standing ally who she had known since Oxford University. 

But relations between the pair have proved far tenser than anticipated. On Wednesday, Hammond suggested that students could be excluded from the net migration target. "We are having conversations within government about the most appropriate way to record and address net migration," he told the Treasury select committee. The Chancellor, in common with many others, has long regarded the inclusion of students as an obstacle to growth. 

The following day Hammond was publicly rebuked by No.10. "Our position on who is included in the figures has not changed, and we are categorically not reviewing whether or not students are included," a spokesman said (as I reported in advance, May believes that the public would see this move as "a fix"). 

This is not the only clash in May's first 100 days. Hammond was aggrieved by the Prime Minister's criticisms of loose monetary policy (which forced No.10 to state that it "respects the independence of the Bank of England") and is resisting tougher controls on foreign takeovers. The Chancellor has also struck a more sceptical tone on the UK's economic prospects. "It is clear to me that the British people did not vote on June 23 to become poorer," he declared in his conference speech, a signal that national prosperity must come before control of immigration. 

May and Hammond's relationship was never going to match the remarkable bond between David Cameron and George Osborne. But should relations worsen it risks becoming closer to that beween Gordon Brown and Alistair Darling. Like Hammond, Darling entered the Treasury as a calm technocrat and an ally of the PM. But the extraordinary circumstances of the financial crisis transformed him into a far more assertive figure.

In times of turmoil, there is an inevitable clash between political and economic priorities. As prime minister, Brown resisted talk of cuts for fear of the electoral consequences. But as chancellor, Darling was more concerned with the bottom line (backing a rise in VAT). By analogy, May is focused on the political imperative of controlling immigration, while Hammond is focused on the economic imperative of maintaining growth. If their relationship is to endure far tougher times they will soon need to find a middle way. 

George Eaton is political editor of the New Statesman.