IF YOU want to say that something is too high or too low, you need to know its current level first. For instance, imagine a survey that suggests a majority of the public wants government to increase spending on defence. I would be immediately sceptical of such findings for two reasons. Firstly, the responder is rarely asked to consider the costs involved (such questions should also contain the phrase “and this would increase your tax burden by £x”). And secondly, the public is unlikely to know the current level of spending – a follow up question should be “by how much?” It is impossible to say spending is the “right” amount unless you know the level of current spending. For instance, Britain’s defence budget is the third highest in the world, at around £40bn in 2011.
The same concept applies to tax rates. Before declaring them too high or too low it’s important to know what they actually are.
When I teach public finance, I ask students what they believe a fair tax schedule would look like. In other words, what proportion of the total tax bill should the top 1 per cent contribute, the top 2-5 per cent and so on? Almost all students believe that the top 1 per cent should pay a greater share than the bottom 50 per cent. But how much?
Using data from HMRC and published by the Office for National Statistics, I can show how much different income groups contribute to the total amount of income tax received (see pie chart, right).
The top 10 per cent of UK earners contributes 58 per cent of all UK income tax revenues. I hear many claims lately that the 1 per cent doesn’t pay its fair share, but then many people I ask are also surprised at how high the 1 per cent’s contribution already is (28 per cent of UK income tax receipts). In the US, the figure is even higher – the top 1 per cent of US earners contributes 37 per cent of income tax receipts. By contrast, the poorest 50 per cent of the UK population supplies 10 per cent of income tax revenues. And the same figure for the US is just 2 per cent.
You may say that the rich should pay even more and the poor even less. But it strikes me that such proclamations should be built on an awareness of the status quo. That my students – and I daresay many readers – are surprised at just how progressive the existing tax system must surely be food for thought.
Anthony J. Evans is associate professor of economics at London’s ESCP Europe Business School.
Email him at firstname.lastname@example.org