Shock, horror: UK needs rich people

Allister Heath
BRITAIN doesn’t just need more jobs – over time, it also needs them to be better, higher productivity and hence higher paying jobs. This would be good for everybody: for the millions concerned and their families; and also for the public finances, which desperately need an overall rise in prosperity. Such a scenario is, however, easier outlined than achieved: it requires a rebirth of UK capitalism, including a long-term revolution in skills, attitudes, incentives and infrastructure.

In the meantime, the Treasury’s self-interest is to encourage success, hard-work, innovation and risk-taking: to maximise tax receipts, it needs as many people as possible to feel motivated or able to try and climb the income ladder. It also needs policies to grow, rather than shrink, the number of people on very high incomes. Given that they pay much more tax than anybody else, in absolute terms and as a share of their incomes, this would help the public finances more than anything else. The problem, of course, is that the UK tax code, the regulatory system and the overall culture are now all rigged against advancement and effort at all income levels.

Obvious, really. Except that the Labour Party, the unions, the Lib Dems and numerous commentators don’t see it that way: their dislike of the City is so intense that it trumps everything else. They refuse to admit that large incomes – and, yes, especially the dreaded bonuses – are an absolute boon to the Exchequer, with around half of the compensation paid out by big firms being gobbled up in tax. And the more tax raised, the less there is need for spending cuts.

HMRC’s estimates for 2010-11 are that there will be 27.799m people earning between £6,475 and £50,000, 2.050m on £50k-£100k, 342,000 on £100k-£150k, 145,000 on £150k-£200k, 143,000 on £200k-£500k, 26,000 on £500k-£1m and 13,000 on £1m-above. In other words, out of 30.518m people eligible to pay direct taxation on their income, 29.849m (or 97.8 per cent) make less than £100k and 669,000 (or 2.2 per cent) make £100k or more. Just 327,000 people (1.1 per cent) will make at least £150k, the rate at which the 50p tax kicks in.

The top 1 per cent of earners paid 11 per cent of income tax in 1976-77; by 1986-87, this had risen to 14 per cent. In 1999-2000, they paid 21.3 per cent; in 2008-09, 23 per cent and by the current fiscal year they are predicted by HMRC to pay 26.7 per cent of the total. All of which means that those 327,000 souls on £150k or more actually ended up paying over a quarter of income tax this year. It wouldn’t take too large an increase in their numbers to make a substantial difference to tax revenues; even a smallish reduction would finally bankrupt the UK.

Comments by David Cameron yesterday suggest that he understands this. For the first time, he provided a balanced analysis of the crisis, while pledging not to “micro-manage” and “scapegoat” banks. He also rediscovered supply-side economics: “high rates of marginal income tax discourage people from working,” he said, pointing out that lower tax rates went hand-in-hand with the rise in the share of tax paid by the wealthy.

Even those on the left who hate the rich, bankers and the City need to realise that they finance the public sector to a greater degree than ever before. The public finances will only truly recover when they – together with the rest of the population – begin to prosper again.
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