“The richest pay the most tax”. This statement routinely appears in news headlines and in comment pieces. Unsurprisingly, the public believe it. A recent poll by Ipsos MORI for the Equality Trust found that 68 per cent of the public think the richest 10 per cent of households pay more of their income in tax than the poorest 10 per cent.
In reality, the reverse is true as a new report from the Taxpayers’ Alliance reminds us today. The bottom 10 per cent of housholds pay 47 per cent of their income in tax (by far the highest of any group), while the top 10 per cent pay just 35 per cent. This disparity reflects the regressive nature of the tax system. The poorest households earn too little (£3,875) to have benefited from the increase in the personal allowance to £10,000 and are hit hardest by VAT and council tax. Only in the case of income tax (often erroneously shortened to “tax”) do the richest pay the most.
The current political debate over tax is entirely at odds with these realities. The Tory-Lib Dem pledge to increase the personal allowance to £12,500 by the end of the next parliament is spun as a measure to help “the poorest” but the biggest winners would be the affluent. As the IFS has found, 69 per cent (£8.4bn) of the £12.2bn per year giveaway would go to working families in the top half of the income distribution, with just 15 per cent going to those in the bottom half. The 4.6 million workers who earn too little to pay income tax would gain nothing. Indeed, the Tories’ accompanying pledge to freeze working and non-working benefits means they would lose out. By promising to also increase the 40p rate threshold to£50,000 by 2020, the Conservatives would tilt the tax system in an even more regressive direction. Despite being sold as a tax cut for the “middle class”, just 14 per cent of earners would benefit.
While Labour rightly plans to tax both the income rich and the asset rich more (in the form of a 50p income tax rate, a mansion tax, a bankers’ bonus tax and curbs on pension tax relief), its tax cut proposals are even less progressive. It has pledged to reintroduce a 10p rate of income tax, a policy that would again benefit the top half most. As the IFS notes: “The impact of a small 10 per cent starting-rate band would be almost identical to the impact of a slightly smaller rise in the personal allowance … Raising the personal allowance is slightly more progressive, because the lowest-earning beneficiaries from both policies – those on just above £10,000 – have their marginal income tax rate reduced to zero rather than to 10 per cent.”
No party, it seems, is prepared to provide relief where it is most needed – at the bottom. Rather than reducing income tax (the most progressive tax), it would be fairer of Labour and the Tories to cut VAT (raised to a record 20 per cent by George Osborne in 2010) and National Insurance, currently levied on incomes above £7,956. Increasing the threshold for the latter to £10,000 would reduce taxes for 1.2 million workers who earn too little to benefit from an increase in the personal allowance. Alternatively, as the IFS has noted, raising the level at which in-work benefits are withdrawn by 20 per cent would be “a bigger giveaway in entitlements to working families in the bottom three income deciles than the gains to that group of raising the personal allowance to £12,500, despite costing £10bn per year less”. Yet far from proposing to do so, Osborne announced in his Autumn Statement that the Universal Credit work allowance would be frozen until 2017/18.
No party would explicitly defend a system under which the poorest pay most; their stances rely on public misunderstanding. Reforming this indefensible model would serve both social justice and economic growth (the poorest are forced to spend, rather than save, what they receive and stimulate growth as a result). Will any party take the chance?