Stop acquisitive politicians forever with a max tax guarantee

 
James Sproule
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HOW MANY times have we heard a politician say that “those with the broadest shoulders should bear the greatest burden”? Indeed, given the frequency with which this mantra is repeated, you could be forgiven for thinking that the rich are only taxed lightly.

The reality is somewhat different. If anything, the UK is dangerously dependent upon a very small number of taxpayers, with less than 1 per cent of all income taxpayers accounting for 24 per cent of all income tax receipts. Or to put it another way, the top 0.9 per cent of taxpayers pay more than double the amount of tax contributed by the bottom half of all taxpayers.

You can think that this is as it should be or egregious. But surely it is common sense that we should be doing everything we can to ensure that these rich taxpayers are happy to remain in the UK – and contributing so much to the Exchequer.

Yet for some commentators in the taxation debate, it seems the sky is the limit; the rich can be called upon again and again to bridge the gap between what the government wants and what it can afford. Hard choices on spending need not be faced, if only the rich can be made to pay ever more.

But if rhetorical broad shoulders are the criteria, is there any limit? The logic is in danger of being limitless. What is to stop the government from taking taxation to 83 per cent, as we had in the late 1970s? Such a level of tax may be well above the point at which revenues are maximised, but we are already above such a point with an effective marginal tax rate of 47 per cent. This has done nothing to lessen the calls that the rich must pay more.

It is therefore time to introduce the idea of a max tax – a guarantee that the state will never take more than half of anyone’s earnings in a single year. It would be a simple clear signal that there is a limit to how much anyone can or should be expected to contribute to the state.

This policy would take into consideration all direct taxes, with income taxes, employees’ national insurance contributions and council taxes all measured against total income. Yes, this would mean some very wealthy people might not be charged some of the taxes for which they were liable. But they were in all honesty being over-taxed, and fairness has to be an overriding principle of any sustainable taxation system. Equally, it has to be stressed that this is not setting a maximum of 50 per cent as a marginal tax rate (a rate we already exceed). But it limits the government to taking half of anyone’s total income at the very most.

At the moment, the max tax would not currently have any effect, given the lower starting rates of tax and generally modest levels of council tax. But the trend is ominous. A portion of national insurance is no longer capped, and those earning more than £100,000 a year already lose their tax free personal allowance. Will other subtle adjustments leave high earners paying taxes on ever more of their income, at an ever higher rate?

Then, of course, there is the haunting spectre of a mansion tax (or a South East property tax, as it should be called). The proposed measure’s effect is as yet unknown, but it could well be akin to the ruinous taxes applied to what was once Britain’s well-funded pensions system.

Of course, no Parliament can bind its successor, so any law implementing a max tax could always be reversed. But reversing such a law would send a clear signal: that any future government was planning on taking more than half the income of some of its citizens. Such a watershed moment would clearly deserve debate and justification.

Something of a rarity in the Budget policy debate, a max tax law would currently be painless to introduce. But there is a genuine concern that the sky is the limit in terms of taxation. Effective policy is not only about what it achieves, but the message it sends as well. There is now a grave need to send a message that the government appreciates there is a limit as to how much the state can ever expect anyone to pay. And any government taking half of your total income is taking more than enough.

James Sproule is chief economist and head of policy at the Institute of Directors.