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Rich people are not over-taxed - they just have all the money

The tax burden on high-earning individuals has gone up not because politicians have been taking them for all that they’ve got, but because they’re the ones earning all the money in the first place.

The City of London. Photo: Getty

I think I've identified a new logical fallacy. It's quite a specific fallacy, admittedly, so best I can tell no one’s bothered to give it a name – but it's popping up with infuriating frequency nonetheless.

You can spot this fallacy in action whenever the thorny topic of rich people and their taxes rears its head. This piece of obvious trolling, for example, comes from the beloved mayor of London who is, as ever, concerned for the welfare of the forgotten and disenfranchised:

The top 1% of earners now pay 29.8% of all the income tax and National Insurance received by the Treasury. In 1979 – when Labour had a top marginal rate of 83% tax after Denis Healey had earlier vowed to squeeze the rich until the pips squeaked – the top 1% paid only 11% of income tax. Now, the top 0.1% – about 29,000 people – pay an amazing 14.1% of all taxes.

In other words, even though tax rates have fallen, the tax burden borne by the rich has grown. Ergo, we should stop being so beastly to the poor lambs.

Can you spot the hole in the logic there? I don't think it's particularly subtle, but it seems to have evaded Boris "he was an Eton scholar, you know" Johnson.

Tell you what, here's another example of Elledge's Fallacy at work. (Hmmm. The name needs some work.) This time it's from the Mail's This Is Money website, and dates from February 2012, but the quote concerns a similar set of numbers to those outlined by Boris:

Michael Spencer, chief executive of the City broker Icap and former treasurer of the Conservative party, said: “The debate about tax in this country has sadly become more and more about politics and less and less about what is good for the economy and for growth. All we hear about is ‘the rich must pay more; soak the rich’. Well the facts are clear; the rich are paying much more."

Actually, the facts are not clear. The facts are very, very unclear.

That’s because there are two numbers that could explain the rise in the share of income tax paid by the ultra-rich. One is the tax rate they pay; the other is their taxable income. Their share of the tax burden has gone up not because those latter day sans-culottes Gordon Brown or George Osborne have been taking them for all that they’ve got, but because they’re the ones earning all the money in the first place.

All those figures quoted by Johnson and Spencer show is that inequality has gone through the roof. According to the Resolution Foundation, the share of national income going to the top 1 per cent of earners has, over the last 30 years, risen by a half (from 2 per cent in the late 1970s to around 3.1 per cent in 2010). Over the same time period, the share going to the bottom 50 per cent shrank by a quarter, from 16 per cent down to 12 per cent. Include bonus payments, which are mostly earned by those at the top, and the share of income going to the bottom half of the UK workforce stood at just 10 per cent.

Let me say that again: half of British workers, put together, take home just one pound in every ten earned in Britain.

Now there are all sorts of reasons for this (lower top tax rates, the rise of the City, globalisation, spiraling executive pay). Some of these are down to government action; some of them aren’t.

But the ultimate result is the same. Britain could have been paying flat taxes for the last 30 years, and the share of tax paid by the rich would still appear to have soared. That's because – I can't believe it's even necessary to spell this out, but there it is – they're the ones with all the money.

The upshot of all this is that figures showing the total share of income tax paid by the rich tell us nothing about whether they’re over-taxed or not. There may be good reasons to lower taxes on the rich – to stop the City decamping en masse to Zurich, say, or to prop up Britain's all-important luxury yacht business. (I doubt it, but what do I know.) But there is nothing in the figures quoted by Boris and his ilk to back up this point.

All those figures tell us is that the biggest earners are taking home the biggest chunk of the money. That, oddly enough, we already knew.

 

Tags:Tax