Here’s what George Osborne said in his Budget speech:
Income tax represents almost 32% of all the tax we receive so this is a not insignificant statistic. But is it right?
It is, in fact, very wrong indeed. It would be more accurate to say that the highest earning half a percent pay 28% of all the income tax we receive. But it’s important we understand why this is. And what it tells us about whether we really are “all in it together”.
A high proportion of income tax revenue being paid by a small proportion of earners might be because we have a progressive tax system. Or it might be because we have income inequality. Either would deliver this result. But only one of them would be thought a positive political achievement.
Our system for taxing income is not nearly as progressive as you might think.
On income over £10,600, you will pay tax – including National Insurance Contributions – of 32%. On income over £42,385 you pay tax of 42% and on income over £150,000 you pay tax on income of 47%. But tax on income – excluding National Insurance Contributions – is more progressive.
George Osborne gave us the figure for income tax. Because it is our most progressive tax it overstates both the proportion of tax paid by high earners and the proportion of tax on income paid by high earners.
What about the alternative, income inequality?
From 2010-11 to 2015-16, the number of people earning more than £500,000 grew 44% from 32,000 to 46,000. And the number earning more than £2m per annum grew by around 500%. But this (it should be noted) only returned us to roughly pre-financial crisis levels.
And it wasn’t merely the number of high earners who increased – but also the amounts they earned. The amount earned by the average earner in that £500,000 plus bracket increased 16% from £1.122m in 2010-11 to £1.3m in 2015-16. By way of rough comparison, average weekly earnings grew from January 2011 to January 2016 by about 7%.
What about the tax paid by the average earner in that £500,000 plus bracket? It increased too (from £472,000 in 2010/11 to 514,000 in 2015/16) but only by 8.9%, much less than the increase in earnings. This is, of course, because of the cut in the top rate of tax from 50% to 45%.
So both are contributors.
One final point.
If you want to understand how progressive our tax system is, you really should look at it as a whole rather than focusing (as Osborne did) only on its most progressive element (income tax).
Looked at as a whole, the lowest earning 20% of households is the most highly taxed. That 20% pays 38% of its cash income – including benefits – in taxes. The second ‘quintile’ pays 30% then 33% for the third, 33% for the fourth and 35% for the top 20% (see Table 1 here).
This is because pretty much all of our other taxes are regressive. Big shout out to Council Tax which – even after Council Tax Support – consumes 5.8% of the cash income of the lowest earning 20% of households but only 1.8% of that of the highest earning.
If the Conservatives really did want a more progressive tax system they could start with that.Follow @jolyonmaugham