Why it’s wrong that nearly half the population pays no income tax – Bill Jamieson

For citizens to have a sense of belonging, everybody should pay something. For any sense of social equity, this principle is vital, writes Bill Jamieson.

There is a more equitable and affordable alternative to Boris Johnson's campaign pledge to raise the 40 per cent income tax threshhold from £80,000 (Picture: Jeff J Mitchell/Getty Images)

Tax? We’re surely all paying too much, aren’t we? The UK tax take has never been higher – set to top £756 billion this financial year. And income tax is the single largest source of government revenue, accounting for £193 billion or more than a quarter of the total.

Are not our backs breaking under the weight of such a burden? But look again. Almost half the population is now paying no income tax at all.

Analysis of HMRC records by the Institute of Fiscal Studies (IFS) this week shows that 43 per cent of adults do not pay income tax, up from 38 per cent in 2010. Far from the population being broken on the wheel of income tax, millions are not liable at all. Rejoice at the Nirvana of a country with an ever-rising total of government spending – and almost half the population paying no income tax!

There is, of course, another side to this – that the top one per cent of earners are now paying 27 per cent of the total raised in income tax. That is a dangerous – and increasingly vulnerable – polarisation.

But my concern here is more philosophical: that in the interests of social cohesion and social solidarity, everybody should pay something. One of the essential conditions for a sense of belonging is that we make a contribution to the social good. That does not mean that contributions should not be tapered according to our income and ability to pay. But equally, no social order can long survive when almost half its members are exempt from making a contribution. Where such a large proportion has made no direct contribution – no personal ‘skin in the game’ – how can we value such concepts as ‘the social wage’ or assess what is an equitable allocation of public spending?

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This polarisation is particularly evident at the other end of the earnings scale. The IFS produced a vivid ‘heat map’ of the UK showing where the top one per cent of earners (ie, those earning £160,000 and over) live. In large areas of Scotland, the top earners account for just one to two per 1,000 of the adult population and in certain areas of the Central Belt, it falls below one per thousand. Edinburgh constituencies are in the ‘third’ division, with between five and ten top earners per thousand. The greatest concentration of top earners is in London and the south-east: if you wanted an illustration of how deeply divided this country is, look no further.

Yet for any sense of belonging, everybody should pay something. For any sense of social equity, this principle is vital. The current state of inequity is only made possible by heaping on taxes in other areas – a 20 per cent rate of VAT, for example, which raises £137 billion. Or so-called National Insurance, an effective tax on employment, which raises £142 billion.

Then there are the many smaller imposts and charges – council tax, business rates, parking charges, taxes on alcohol and tobacco, planning fees, fuel duty, air passenger levies, inheritance tax, Capital Gains Tax, Vehicle Excise Duty, Insurance Premium Tax, environmental levies – there is no end to what a government will find less politically sensitive to tax than altering income tax rates and bands. The problem with all these is that few perceive them as a benefit in terms of higher social spending.

Is the principle of ‘everyone should pay something’ so objectionable? If, for example, there was a low starter rate of five pence in the pound on the first £5,000 of taxable income, it would be affordable to most while giving everyone a greater sense of ownership and participation in the decisions affecting public spending and the allocation of tax revenue.

What of changes that can be made at the other end of the income tax spectrum? Boris Johnson pledged to increase the point at which people start to pay the higher 40 per cent rate of income tax from £50,000 to £80,000. He has since modified this to become a longer-term ambition. And little wonder, since the cost would be £9 billion a year – and just when he has launched a public spending free-for-all: more police officers, more money for the NHS, major infrastructure projects in the north of England, more money for schools.

A more affordable – and equitable – alternative would be to address the iniquity of inflation creep by which the Treasury rakes in more money by the silent stealth of inflation – more people swept into higher tax brackets each year. Over time, as the IFS’s Paul Johnson pointed out, the numbers liable for higher income tax has grown, from about one and a half million in the early 1990s to well over four million today; all this without a single announcement from the Treasury. The threshold for the top 45 per cent rate down south has remained at £150,000 in cash terms since it was first introduced in 2010. Had it risen with inflation it would now stand at about £180,000.

Here in Scotland, there is already a starter rate of 19 per cent for those with incomes between £12,500 and £14,549. For those earning between £24,944 and £43,430, there is an intermediate rate of 21 per cent. For those earning between £43,340 and £150,000 the higher rate of 41 per cent applies. And for those earnings above £150,000, the top rate of 46 per cent applies. The issue here is whether these higher imposts will yield as much extra revenue as the Scottish Government hopes. So there is much that can be done to reform our tax system, remove the iniquity of hidden tax rises and at the same time create a greater sense of social cohesion. Prospects for change in the foreseeable future? None. How long can this state of affairs continue? I fear it will fracture sooner than we think.