LibLink: Jonathan Portes on wealth taxes & ensuring the ‘rich’ pay their fair share

by Stephen Tall on October 2, 2012

Jonathan Portes, director of NIESR and former senior Treasury official, is not a Lib Dem — he recently contributed to LibDemVoice to critique the Coalition’s economic policy — but he is addicted to robust evidence. And the recent spate of right-wing commentators rubbishing the Lib Dems’ call for increased wealth taxes to help tackle the current economic crisis has roused his ire:

The Liberal Democrats call for a “mansion tax” (that is, a higher rate of council tax for the most expensive properties), possibly supplemented by some form of wealth tax seems to have provoked a peculiarly illogical misuse of one particular statistic among economic commentators who really should know better. Their objective appears to be to show that the “rich” are already paying more than their “fair share”, and that any additional imposition would be both unfair and economically damaging. This is, of course, an entirely legitimate argument, both as a matter of ideology and of economics. But they will have to come up with some rather more convincing facts and evidence than they have so far.

Why? Because they — he names Dominic Lawson, Allister Heath and Fraser Nelson — have tended to focus exclusively on what top-earners pay in income tax.

But what does this tell us about ability to pay, “fairness”, or the feasibility or desirability of a wealth tax? Almost nothing. To make arguments about the fairness, or otherwise, of the UK tax system purely on the basis of the burden of income tax is simply absurd. Income tax is the largest single tax; but it constitutes only about 27% of the overall tax take.

So what can we say about the fairness of the current tax regime. Jonathan Portes looks at the Office for National Statistics (ONS) figures and notes:

… the top 10% have gross income averaging £107,500, of which they pay £35,000 – just under a third – in all taxes, direct and indirect. Meanwhile, the average household has income of £37,700, of which they pay £12,700, or just over a third, in taxes. … Overall, it is impossible to avoid the conclusion that for the vast majority of the population the UK tax system is at most modestly progressive.

Ah, but what about benefits? Surely this leads to a massive redistributive skewing, with vast dollops of income transferred from the wealthiest to the poorest. Again, it’s not quite that simple:

The benefit system is highly progressive, so, overall, the system is indeed redistributive, especially for the bottom two quintiles; their share of total income doubles as a consequence. But much less so at the top. The share of original income that goes to the top tenth of the population is about a third: their share of final income, after all taxes and benefits, is only slightly less, at about 29%. Hardly confiscatory. … the middle class is a “net recipient of government largesse” [Dominic Lawson’s contention] only in the sense that they pay into the system when they are working and take out of it when they are retired.

His conclusion:

It is clearly possible on the basis of the facts to argue that the UK tax and benefit system is progressive; that top earners are paying their “share”; and (a separate argument) that there are significant potential disadvantages to wealth and property taxes (although I am sceptical that there is any serious economic or fairness argument at all against making council tax less regressive than it is at present). But to argue any of these on the basis simply of the share of income tax paid by top earners is at best disingenuous, particularly when the numbers giving the broader picture are so easily available.

You can read Jonathan Portes’s post in full here.

* Stephen Tall is Co-Editor of Liberal Democrat Voice, a Research Associate for the liberal think-tank CentreForum, and also writes at his own site, The Collected Stephen Tall.