This year we’ll collect a little less than £170bn of income tax, roughly a third of all tax receipts. We’ll also forego through reliefs about £30bn of income tax.
Spread evenly amongst the population that £30bn would deliver to every man, woman and child almost £500 a year.
But it isn’t. It goes overwhelmingly to those who need it least. And that’s not mere happenstance. It’s the inevitable consequence of two deliberate policy choices: to distribute that £30bn through the tax system. And to fail to monitor what good it does.
Let me give some specifics.
Last year we spent £480m per annum rewarding those who earn more than £54,000 per annum and make gifts to charities. We spent nothing rewarding those who earn less.
This year we’ll spend £2.6bn per annum encouraging saving in ISAs. But the average ISA holder with annual earnings of more than £150,000 will get – through higher savings relieved from income tax at higher rates – well over 6 times as much tax relief as her equivalent earning between £20,000 and £30,000 per annum.
In 2013/14 the highest earning 1% of taxpayers made almost 13% of all contributions to pension schemes. Pension scheme relief costs £21bn in income tax foregone. But that 1% of taxpayers – roughly 0.5% of adults – will get even more than 13% of that £21bn because we give them a larger tax bonus than those who earn less.
HMRC doesn’t publish much data on how the benefit of these reliefs is distributed between rich and poor. By and large you have to stitch the statistics together.
But HMRC does track one particular sub-set of reliefs: “Allowances given as tax reductions”. It comprises, in particular, Venture Capital Tax Relief, Enterprise Investment Scheme Relief and Seed Enterprise Investment Scheme Relief. Remarkably Additional Rate Payers – those earning over £150,000 – receive 69% by value of those reliefs. That figure has risen every year since 2010/11.
More striking still, the highest earning 15,000 taxpayers – an almost homeopathic 0.05% of all taxpayers – netted 5.5% of total deductions and reliefs. Most will have seen six figure reductions to their income tax bills.
Why is this? Should we be concerned?
It’s hard to find sense in it.
Take pension tax relief as an example.
The more you earn, the more likely you are to have surplus income. Because you have surplus income you’re less in need of incentivises to save for your retirement. But the tax system gives you more.
That’s not sensible policy. It’s a wasteful bung.
We can make the same argument for ISAs. If a couple can afford to save what the median household earns (after direct taxes and benefits) – and that’s what the annual ISA limit for a couple represents – why do we spend money giving them incentives to save? If there’s money to be spent, surely we bolster the position of those who struggle to save rather than those compelled to by surplus income.
We don’t need to reward the wealthy for making donations to charity. The impulse to donate is a civic responsibility. It doesn’t need to be greased. Only the wealthy win, and the causes they prioritise. Good for Opera Houses; Youth Clubs, not so much.
These – I can put it no politer than ‘anomalies’ – have two related causes.
First, we deliver these reliefs through the tax system. It must be this that has led us unthinkingly to give most generously to those who have the highest earnings and so pay the most tax. But to achieve the public ends these tax reliefs serve does not require that we forego the most from those who pay the most.
That brings us to the second. We have no mechanism for assessing what public good we achieve with this £30bn. The absence means our political class need not confront the question. And what they can pretend they don’t know they can pretend they needn’t remedy. This state of affairs is convenient to them. Because the noise made by the losers from tax decisions tends to drown out the applause from those who’ve won.
But there is an answer. And a precedent.
Interest rates decisions were once heavily politicised. Were they still, now, in the hands of the Government the UK would be a more dangerous place. After seven years of near zero interest rates could any Government hold the line between depositor pensioners and the borrower working age population? But, devolved to the Bank of England, the political heat has simply evaporated.
As it was with interest rate decisions, so it could be with tax reliefs. Value for money assessments, decisions around functioning, decisions around shape; all these could be devolved to an independent body such as the Office for Budget Responsibility. Over time, and insulated from political heat, it could reshape tax reliefs to operate in the public interest.Follow @jolyonmaugham
I do struggle with your “almost homeopathic” comment. If the dilution of taxpayers was the same as a “popular flu remedy” and all the atoms in the universe were potential taxpayers, there would be no taxpayers. Homeopathy should be taken out of medicine so please keep it out of tax.
Otherwise, I agree with much of what you say. Especially in relation to charities. Why should someone be able to get a refund of the tax that they pay by gifting to a particular charity (especially one that they may well have set up and be a trustee of) that then doesn’t spend the money for a very long time or buys something of very indirect benefit like art? But when there was an attempt to cap this relief there was an outcry. I think what would be helpful to focus on more specific ways to limit the tax relief so that it will provoke less of an outcry (e.g. charity must be independent from the donor – you can’t be a trustee of it or connected with a trustee, it can’t own a subsidiary that is a member of your LLP, etc.). So I think it would be helpful if you focused on more specific ways. I’d also be interesting in seeing if the Labour party changes its view on that (I think that the shadow charities minister made some random comments that were a bit over the top).
I think that you only give part of the story though. Some of the relief are just a deferral. And a basic rate taxpayer does get a benefit from contributing to charity as they only have to give a net amount for the charity to get a gross amount, so they can choose to give less.
My understanding of gift aid is that the additional gift aid tax relief claimed by higher rate tax payers accrues to the charity, not the donor. It would be very interesting to see which charities were benefiting from this additional gift aid – it may be Opera Houses, or indeed neoliberal thinktanks. But it may not. We simply do not know. More transparency is essential.
No. It accrues to the donor.
ok I see what you’re getting at – the difference between basic and higher rate is reclaimed via the tax return – I always assumed that it would then be passed on to the charity by the donor. Silly me!
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Incentivising ISAs does make sense if you want to take money out of circulation and damp down potentially inflationary consumer spending.
Why they’re doing it *now* is harder to explain.
I have never personally invested in VCTs, EIS or SEIS for a variety of reasons but I consider that, properly targeted, there is a strong case for HMG ‘nudging’ investment into genuine start-up and scale-up trading businesses which inevitably carry a higher degree of risk and are more difficult exit route than investing in shares in BP, Tesco, HSBC & Coca Cola etc. I think there is a good case for ‘democratising’ these tax reliefs to make them more attractive to basic rate taxpayers but I would be uncomfortable if those earning less than, say, £50k invested too much in such shares.
So far as the tax relief for gifts to charities are concerned, I think many on the right and left agree that it is counter-intuitive that an individual is able to prefer their favourite charitable causes over, say, increasing spending upon health, defence, education, border security or whatever but, almost everyone in the charity sector I spoke to when the restrictions were proposed by the Coalition Government, were extremely concerned about its impact upon many charitable causes most of us would support. Whether it would be possible to restrict the tax relief to a sub-set of the most worthy charitable causes, I will leave it to others to comment upon.
Accordingly, for both of these reliefs, I think the price paid in lost tax revenues is worth the desired goals.
As always, it depends on where you start. Just looking at the gift aid issue for the moment. £480m in tax benefit means that c£2bn has gone to charities. At a time when Government funding has been cut across a number of areas, you could argue that this has replaced what ‘should’ have been spent by Government. (‘Should’ does depend on your view as Stephen states: arts? possibly; armed service veterans? probably; medical research? definitely; animal charities? not so much).
Starting from here, it is not a tax saving – its a 100% tax charge, with a c25% rebate. We do have the issue that it is an individual’s choice not decided centrally.
Yes – someone under £54k income pa doesnt get a rebate, and perhaps they should.
Congrats on an incisive article.The points you make support my position that the tax system should not be(ab)used as a tool to direct expenditure.
Taxation should be a “stand alone” function of collecting all due taxes and using the proceeds equitably to advantage the maximum number of people.
I think a lot of what you suggest is sensible but describing it as “welfare for the wealthy” is a bit misleading unless you present the net contribution – i.e. the top 1% contribute c.5% of income tax, and claim around 5.5% or reliefs.
There is a valid argument to be had about the way reliefs accrue across income groups but to present it in isolation without the context of income tax paid is deeply misleading.
I disagree. I’ve explained why in the “First, we deliver…” paragraph. The fact people pay more tax doesn’t have as its logical consequence (indeed I think it’s an illogical consequence) that they should get more incentives to save or donate.
“It accrues to the donor”
Not if – as seems likely – individuals make decisions on donations based on their disposable (i.e. net) income. How is higher rate relief ‘good for Opera Houses’ if the relief doesn’t accrue to the Opera House?
Something similar applies to EIS. As it happens I’m about to invest in an EIS-qualifying restaurant business. Of course I might benefit from this if the undertaking is successful, but the restaurant business being what it is there is an at least equal likelihood that EIS will mitigate my losses. I certainly wouldn’t invest in it if it weren’t for this, so here the tax relief is quite likely to accrue to someone other than me. The Burgundy lovers of London, perhaps.
So these reliefs aren’t necessarily, ‘welfare for the wealthy’. They are more mechanisms by which the wealthy can direct tax money away from government towards their own pet causes. Not that this is necessarily any more defensible.
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“First we deliver these reliefs…”
Wrong. First an honest individual goes out to work, works hard and honestly (we’re not suggesting otherwise are we?) and earns their pay for doing so. So that money is their’s. Next the State, absolutely necessarily, takes some of their money from them. THEN and only then can you discuss reliefs.
That is if the individual is getting relief. Because the economic outcome appears to me to be the economic benefit of that portion of his gross income previously taken by the government is now received , by will of Parliament, by the the charity.
Of course if you believe a person’s one belongs in the first instance to the State…
I disagree. I think taxes mandated by democratically elected Governments are the ticket price for participation in society. It’s only what you’ve got left after paying the ticket price that is “yours”.
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But what if part of that ticket price is considered to be a donation to charity?
Does it really make that much of a difference? Obviously high tax rate payers benefit from charitable tax relief, but at the end of the day, it’s simply a way to modify the tax rates while nudging behaviour.
You could achieve very similar results by creating more tax bands or lower the top rate of tax. Why is providing a tax relief somehow worst than lowering the top rate of tax?
Most of recent changes on tax expenditures have been towards raising high earners tax rates anyway (pension relief was much more generous in the past, especially for final salary pension).
I guess you can make a case that tax bands are more transparent, while tax relief is more opaque, but I am not sure that means that tax rates are “legitimate” while tax relief is not, they are both passed by parliament.
I am not a big believer in donation tax relief (and I think it should be entirely removed), but I think you are wrong about the actual incidence of the relief. I know I have calculated the net cost and adjusted accordingly, so I would have simply donated less without the rebate. I am pretty sure most big donation take the tax relief in account to determine the amount. There is a logic in doing it this way.
If you somehow convinced politicians that tax expenditures are unacceptable, you’d just get the same politicians pushing for lower top rates instead… It’s not like that never happens anyway.
Jolyon, with respect ‘it isn’t’, won’t get us very far beyond me saying ‘it is so’ (more accurately. ‘it could be so’).
Rosina’s lifetime achievement award last night for her work with tax charities shows what the third sector are doing that could/should be the work of Government. My donation was a contribution to that work – why is that not part of my total ticket price for living in a civilised society?
NB – shame you didnt win!
Which wealth decile of the population pays the overwhelming proportion of all tax? If we can offer the wealthy incentives to pay their tax in the UK, then I’m all in favour.
Protocol No 1, Article 1
“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
The preceding provisions shall not, however, in any way impair the right of the State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure payment of taxes or other contributions or penalties.”
And as tribunals are presently showing us, the Human rights Act can be brought in to challenge primary legislation where for example there might be double taxation. By tagging taxation into this article the convention and now Parliament provides for a person’s income being in the first instance the individual’s possession; not the State’s. The State’s legitimate access to a possession to secure appropriate payment of tax is not the same as the State claiming its possession. Society reaches down into a dark place when it thinks otherwise.
The top 0.1 per cent of earners – about 30,000 people with a minimum declared income of £670,000 – they may earn five per cent of the total income but pay 11.3 per cent of all income tax.
The Institute of Economic Affairs calculated that the wealthiest 30,000 income tax payers contribute about £18.8 billion in income tax – equivalent to the entire budget of the Home Office and the Ministry of Justice combined.
For the richest 0.01 per cent, they earn 1.9 per cent of total income but pay 4.2 per cent of total income tax.
No one forces you to donate to charity. It is merely felt be some to be a civic obligation or privilege. So, unlike pre-tax money, I wouldn’t say the pre-donation money is not ‘yours’.
Im aware of the statistics, thank you.
I’m glad – statistics are not used frequently enough. They show that a disproportionate amount of tax is paid by the wealthy despite all these “wasteful bungs”. You clearly want to distort this even further. But if you do, the mobile wealthy will pay their tax elsewhere, and then we are all worse off.
Is the tax free personal allowance a type of tax relief included in your figures? If so, low-to-average tax payers are getting a very disproportionate ‘bung’.
I tend to agree with Alessandro. These criticisms would be better targeted at:
1. CGT main residence relief which has exacerbated the UK housing crisis. At least ISAs stop even more money flowing into housing, an unproductive capital sink.
2. The direct tax reliefs available to non-doms, so that for a highly privileged and arbitrarily defined minority, the UK is a quasi-tax haven.
3. The structural flaws in CGT and IHT (including 1) which mean that those taxes no longer act effectively to prevent huge amounts of wealth (often unearned) being concentrated in very few hands. Take a bow the Camerons and the Milibands.
My post is thick with data points. You might try engaging with them.
I did engage with them! And simply commented ‘the more the merrier!’
– all statistics rely on metadata to ensure they are properly understood. So, did you include personal tax-free allowances in your figures for ‘tax relief’?
Alessandro is right. Wealthy donors calculate the true cost of their donation, including the effect of the reduction in their own tax liability, and arrive at a sum to donate to the charity. Removing marginal gift aid relief would mean lower donations to charity. The charities would lose the money, not the wealthy people. It is not possible to ‘make money’ out of donating to charity.
I haven’t suggested it is possible to make money out of donating to charity. And I’m sure you’re right that donors calculate the cost to them.
Sorry, pressed ‘send’ precipitously.
But it’s still cheaper for the wealthy to donate – it costs them less post-tax income – which seems to me unfair and will skew donations. Those were my points and they’re right.
By “skews donations” do you mean they donate more than they might otherwise?
No. As you well know. If you’ve got a decent point to make, make it. If you’re simply going to be argumentative I will ‘trash’ your comments.
It doesn’t ‘reward the wealthy’ though. Yes it rewards the charities they support, but then the very fact that they are wealthy has that effect. Plus, some of the most substantial giving by the super-rich is in fact to youth related and deprivation related causes (and medical research and so on). Charity has a broad definition in this country so the tax relief applies to all of them as a matter of law. As to whether the range ought to be narrowed is another question, but currently any charity that can demonstrate public benefit remains a charity, so there is then no basis on which to assume one charity is more worthy of tax-derived support than another.
It does in relative terms – which was the point I was making. And I didn’t actually call for a cut to charitable tax relief – a point I make only because you might be assuming I did.
“I disagree. I think taxes mandated by democratically elected Governments are the ticket price for participation in society. It’s only what you’ve got left after paying the ticket price that is “yours”.”
You suggest there is a ticket with a price. So where does that leave people who don’t pay tax (ie dont earn an income, all of their consumption is paid by someone else etc.). There are plenty of these who do this, voluntarily or otherwise (eg stay at home mothers, students, seriously disabled etc).
Are you saying such people aren’t part of society or are somehow not paying a price of some kind of ‘ticket’ (whatever that is) to be part of it?
Personal allowances are clearly a “relief” because they are withdrawn from certain individuals that earn above a certain amount. Are you able to say whether or not your figures above allow the income tax foregone by giving a personal allowance? I note that this question has already been put forward a couple of times above, but never answered.
First, the piece is about what are known as ‘tax expenditures’ (which don’t include personal allowances – which are a structural feature). Second, it doesn’t purport to be a universal treatment of tax expenditures. If you had the idea it was everything I don’t know where you got that from. Third, the distributive effects of personal allowances is pretty well known – they accrue mostly to upper middle parts of the income distribution – and so they fall outside the stuff I was aiming to tackle here (which was stuff which isn’t so well understood). Fourth, you seem to be operating under the misapprehension that I have some obligation to answer questions put to me. I don’t – although I tend to answer the more interesting ones. Fifth, it’s my blog and if you want me to respond to questions I’d invite you to adopt a less aggressive tone.
If there’s a policy suggestion here, it seems to be a suggestion that there should be a fair playing field for all ( which is by all accounts a ‘British’ value ). This means maximum 20% Gift Aid on charitable contributions, and maximum 20% avoidance of tax on ISAs for all income levels.
In return Inheritance Tax should be set at the same fair level of zero for all.
This might not be far from being revenue neutral and I think a lot of voters would endorse such moves towards more equal tax treatment.
I have always considered personal allowance a tax expenditure to be honest. But I think the entire concept is not really that useful. I mean benefits are often non means-tested. I think you really need to look at the net contribution, including both taxes and benefits, before you judge the fairness of the system. Progressive taxes are a tool to make a fairer societies, but they are not the only one and I don’t think they are even required: you could achieve a fair society without progressive taxes by increasing universal benefits greatly. I am sceptical it would be the optimal solution, but it’s hard to know a priori.
The current rule on charity giving is simple: you are allowed to give to charity with pre-tax money. That’s it. It’s not some arcane or hidden feature of the tax system, it’s stated clearly up front. You might judge it wrong, but I frankly doubt a majority of people would agree with you (which is what matters at the end). Both rich and poor people have this right. In this sense (which is not the entire picture I agree) they get the same benefit.
As far as pension contributions go, I think it’s useful to follow the history of pensions to understand the current system. Originally pensions were provided by your employer. You would forgo some of your wages (or wage increases to be more accurate) and in exchange the employer would pay you a pension. You’d pay taxes only when you received the pension. Companies wouldn’t pay taxes on the investment gains they made on the assets they put aside to pay the pensions, since their liabilities would grow at a similar pace and there was no profit. This seemed reasonable: the worker was getting nothing until retirement, so he/she only paid tax when retired.
When they decided to allow people to build their own pension pot, they simply followed the same philosophy. Any income you defer was excluded from current tax year and moved to the tax year you paid yourself a pension. All income in the pension fund was taxed only when extracted to consume. I am not entirely sure, but I believe most public pensions still work this way.
Private employers are today getting a much worst deal: they have an annual and lifetime cap on contributions, they pay tax on dividend income and they have to pay some income tax on contributions if higher rate taxpayers.
So if we look at the recent history, the benefit higher income tax payer receive from pension contribution has been curtailed significantly: to the point that I personally contribute nothing to my pension pot since it’s now inefficient to do so, especially considering that the government has already changed the rules against me so many times, I don’t really want to put more money where they can tax it again too easily.
Also I think pension contributions solve one issue which I think still exists in our tax system: volatility is penalized.
Let’s imagine 2 people with the same lifetime earning potential: one works in a stable sector and generates 50k in income every year. The second works in a very volatile sector: one year 100k and one year he makes nothing.
If we remove pension contribution, the second person is going to pay significantly more taxes. Is that really fair? WIth pension contributions, he can at least smooth his income partially, by contributing to the pension only in good years.
I admit that this function is usually performed by a company in our society: employers will pay a stable income to employees even if the sector has volatile returns. But still some individuals have similar earning profile and they must be provided with some mechanism to make their taxes more fair.
I Like Andrew’s suggestions – especially if they were linked to a flat tax rate of 20%.