The tax burden. I was thinking about it the other day as I drove along the M25: a road which was, of course, built out of the tax burden. A year ago, I had an eye operation. That was paid for from the tax burden. My grandchildren go to various schools all funded (or underfunded) by the tax burden. As did my children. And me, of course.
So why is the tax that paid for all of that a burden? That money allows me to travel safely at 70 miles per hour, it stopped me going blind in at least one eye and it relieved my entire family from being illiterate. And every one of those things boosts the whole economy. A country does not get very far if its people walk along muddy tracks, suffering from undiagnosed illnesses and wondering what this thing called reading is.
So who pays this burden? And who does it sit most heavily on? Of course, I know my share of it from the deficit slashing self-assessment payment I send to HM Revenue & Customs each January and July. But where does this burden of paying for things we all need really fall?
By now, I was going round in circles (well it was the M25). I needed data. So when I got back to my office it was cup of tea and spreadsheet time. And in case you are wondering what else the Chancellor and I have in common, it was I who explained a few weeks before his Budget that self-employed people like me carried a lighter burden of taxation than employees. Or, put another way, we pay less of our income towards the roads, hospitals and schools we use than those who work for someone else. Both Hammond and I think that should be changed. A crucial dozen Tory MPs do not. Roll on the next parliament.
You may have read in several places recently that the richest 1 per cent pay 27 per cent of the tax. It is not true. What is true is the slightly less headline friendly: 27 per cent of total income tax receipts are from the 1 per cent of income taxpayers with the highest taxable income. Those 2016/17 HMRC estimates are about just one tax – income tax – and refer to taxable income not wealth.
On my calculations from HMRC data, the average taxable income of this top 1 per cent is around £400,000 and the income tax paid around £150,000. For many of the richest, a lot of that income is from dividends taxed in their hands at much lower rates than earned income.
At the other end, the bottom quarter of income taxpayers have an average income of around £14,000 and pay about £500 of income tax. So while the top 1 per cent enjoy a net £250,000, the bottom 25 per cent struggle along on a minimum wage income. They work for a year to earn as much as the top 1 per cent earn in less than three weeks. So the top 1 per cent do – and should – pay more than a quarter of all the income tax. And they have done consistently since 2007/08.
Of course, income tax is only one part of personal taxation. Second to the £168bn income tax take is VAT, which brings in £115bn. Everyone pays that, though some essentials like food, children’s clothes and (in some cases) fees to advisers are exempt.
Close behind VAT is National Insurance contributions at £114bn. Those on more than £45,000 a year have a huge subsidy because they pay a lower rate of just 2 per cent on earnings above that level, instead of the 12 per cent on earnings below it. That is a subsidy for the top one in seven earners that costs taxpayers close on £10bn a year. Those lucky enough to have unearned income pay no NICs on it. Nor do the UK’s two million landlords pay it on their rent receipts, saving them at least £1bn a year (and probably rather more).
In fact, if there is a tax burden it falls on the poor. Calculations by StrongerInNumbers policy and research consultant Michael O’Connor using Office for National Statistics data show the bottom tenth of non-retired households by income spend 38 per cent of their £11,000 gross income on taxes. The top tenth spend just 32 per cent of their average £120,000 gross income paying taxes. So the bottom tenth are the most taxed in terms of the percentage lost. The least taxed are the second to bottom tenth, who lose 26 per cent of their gross income to tax.
The highest rates of tax on income are also paid by those on the lowest incomes (the one exception to that being people with six children or more and an income between £50,000 and £60,000 who can pay over 100 per cent marginal rate).
From April, people on low incomes who work, pay tax and get their low wages topped up by universal credit will face an effective tax rate of 80 per cent. And before you tell me that is a withdrawal of a subsidy, not a tax, I use the Chancellor’s word from the Budget announcing a slight cut from 2017/18 in the reduction in universal credit as income rises:
“The universal credit taper rate will be reduced in April from 65 per cent to 63 per cent, cutting tax for three million families on low incomes.”
That taper rate – or tax, as Hammond classified it – is applied after deductions for income tax and NI, and before withdrawal of help with council tax. Those three take the new marginal rate to 80 per cent – just one percentage point less than in 2016/17. In other words: earn £10, keep £2. Now that is a burden when you are on the minimum wage.
Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s ‘Money Box’ programme. You can follow him on Twitter @paullewismoney