Poor the great losers from our fiscal folly

Allister Heath
HERE is a disturbing fact you won&rsquo;t have read anywhere else: the poorest families in Britain today pay a greater proportion of their income in tax than the wealthiest. Such a claim may sound crazy but here are the figures: the bottom fifth of earners pay 38.7 of their gross income in total tax, the next fifth 32.7 per cent, then 34.6 per cent, 35.4 per cent, falling to 34.9 per cent for the top fifth of higher-earning households. For those of you about to email in disbelief &ndash; after all, we have just had 12 years of Labour government &ndash; feel free to check out my sources. All these explosive figures are contained in The Effects of Taxes and Benefits on Household Income, 2007/08, a 38-page report by Andrew Barnard, published online yesterday by the Office for National Statistics.<br /><br />My stats are before benefits, such as welfare payments. Their horribly anti-poor bias is entirely due to indirect taxation &ndash; value added tax and duties on alcohol and tobacco &ndash; which hit those on lower incomes much more severely. The bottom fifth pay 27.9 per cent of their gross income in indirect tax, the next fifth 18.6 per cent, then 15.9 per cent, 13.7 per cent and just 10.0 per cent for the top fifth. The poorest fifth of households paid 7 per cent of all tax, up from 6.8 per cent in 1996-97. Remember that next time you hear a well-meaning health czar call for another hike in duties on cigarettes or alcohol. And as you would expect, the better off pay much more in direct taxes &ndash; income tax, national insurance contributions and council tax &ndash; than the poor. The bottom fifth pay 10.8 per cent of their gross income in direct tax, the next fifth 14.1 per cent, then 18.6 per cent, 21.8 per cent and 24.9 for the top fifth.<br /><br />It would be wrong to take these figures as proof that the &ldquo;rich&rdquo; need to be clobbered even further with higher rates of income tax. There is only so much you can squeeze out of people in this way: we have already breached this limit. The 50 per cent rate of tax and the attack on non-doms will yield nothing, while cutting incentives, reducing entrepreneurialism and fuelling a brain drain, threatening Britain&rsquo;s long-term competitiveness and all of our prosperity, rich or poor.<br /><br />However, the poorest should not have to pay so much in direct taxes, only for the welfare state to pay all of it and more back. It would be better to take the poor out of direct taxation altogether, as part of a larger reform of the welfare state. It is equally silly&nbsp; for the rich to be given so much in benefits: as Charlie Elphicke, a top City lawyer, points out in a Centre for Policy Studies analysis of yesterday&rsquo;s data, the poorest fifth received 25.9 per cent of all benefits in 2007-08, down from 28.1 per cent in 1996-97. The richest fifth grabbed 10.6 per cent, up 0.5 points.<br /><br />It makes sense to move away from universal benefits and cut back on handouts for the rich; but for that we will need a revolution in thinking and a decisive break from the post-1945 social settlement. Yet now is the time for revolutionary thinking: Britain faces a true budgetary crisis, with the gap between revenues and spending set to reach&nbsp; &pound;200bn a year. We can either put up tax, with Vat hiked to 22 per cent within a couple of years&rsquo; time, which will raise a lot of money but hurt the poor the hardest; or we can cut spending, which will hit the middle classes the most. We will probably get a bit of both; but focusing on the latter option would be fairest.<br /><br />allister.heath@cityam.com