Bill Jamieson: Hike taxes for '˜the wealthy'? That's rich

Testimony to the disparities in income and wealth can be found in reports of poor families struggling to get by and record numbers resorting to food banks. Photograph: Getty Images

“Let me tell you about the very rich,” wrote Scott Fitzgerald famously. “They are different from you and me”. To which Ernest Hemingway was said to have retorted with the acerbic quip: “Yes, they have more money.”

Just “who is rich” and how we define “the wealthy” will be a key preoccupation in the final weeks of the election. Politicians have been carefully vague: it’s easy to call for higher taxes on some ill-defined segment of the population whose wealth is way above the average voter. It also allays the fear of millions that being better off than average puts them in the firing line for higher taxes. We all wish for higher spending on public goods and services – just so long as we’re not the ones being called upon to stump up for them.

Testimony to the huge disparities in income and wealth can be found in reports of poor families struggling to get by and record numbers resorting to food banks. Turn the page and we read of mind-boggling bonuses for company bosses and massive sums paid to Premier League footballers and the agents who facilitate their transfer. Little wonder many are exercised about wealth and income inequality and how these could be distributed more fairly.

It might seem as if little by way of redistribution through the tax system is already undertaken – that we are setting out on virgin snow. But as the Office for Budget Responsibility has pointed out, the tax burden on British households and businesses is already rising and is on course to hit a 40-year high by 2025, with tax as a share of GDP climbing to 37.5 per cent.

We do not yet know whether Labour plans to hike corporation tax and income tax for those earning £80,000 plus will raise the extra revenue needed to cover its spending plans.

Bear in mind also the context in which higher wealth and income taxes are being considered. Since the last Labour government there have been increases in air passenger tax, VAT, stamp duty and capital gains tax. At least five new taxes have been imposed on politically expedient targets such as businesses, banks and soft drinks.

Last week the Institute for Fiscal Studies posted a detailed and timely blog on income and wealth in the UK. It is an informed and helpful guide for those proposing higher taxes.

Surveys by the Office for National Statistics have attempted to plot reported net wealth including the value of houses, private pension pots and financial assets, net of mortgages and other debts.

It shows that being in the top 1 per cent (around 260,000) of households required more than £2.9 million in total net wealth – almost 13 times higher than the median household (the middle of the range) of wealth distribution. To be in the top 10 per cent, a household needs to possess a more modest £1 m in net wealth, but still more than four times the median.

While there are many people with both high wealth and high incomes, the overlap is far from perfect. There are wealthy individuals with low current incomes, such as older people who own a valuable house but have little income; and there are high-income people who have accumulated little wealth, such as young renters with high-paying jobs. These groups would be among those who might want more precision from politicians who claim to have plans to increase taxes on “the richest”.

Now much of this variation in wealth reflects differences in the age of households. Millions of voters spent decades accumulating savings while earning to provide for years in retirement: that large lump sum of accumulated wealth has to see them through years when there is no salary coming in. This can result in a misleading portrayal of wealth inequality before the pension pot starts to be drawn upon.

Nor should we be shocked or surprised, given the large rises in house prices, particularly in the populous southeast of England, that 25 per cent of individuals aged 55-64 live in a household with more than £1m of wealth, placing them in the top tenth of households, compared to just 4 per cent of those aged 25-34.

However, there is also significant inequality in wealth between individuals of the same age (for example, another 23 per cent of those aged 55-64 live in a household with wealth of less than £200,000), and there is evidence that the greater wealth of older individuals partly represents genuine inequality in lifetime resources across generations.

But what of income inequality and those enjoying enormous pay packets? The IFS turns to HMRC data on income distribution. Bear in mind that 40 per cent of adults do not pay income tax at all due to low incomes. Meanwhile almost 50,000 income tax payers (0.1 per cent of UK adults) had more than £500,000 in annual pre-tax income, amounting to £55.5 billion between them. Some 39 per cent of this – £21.8bn – accrued to just 5,000 individuals: an average of £4.4m per person among that group.

Huge inequality, then – but little wonder that those with merely “very high incomes” do not always feel that well off, even though they clearly are, relative to the vast majority of the population.

The person with an income greater than 95 per cent of income tax payers had pre-tax income in 2014-15 of about £72,000 per year – some £50,000 per year more than that of the median income tax payer. However, it is also £90,000 per year less than someone in the top 1 per cent. For that reason, says the IFS, they may well reasonably feel more similar to the median taxpayer who is well below them in the distribution than to the small group of taxpayers in that top 1 per cent.

Now, these statistics take no account of the myriad variations of household circumstance such as dependent relatives, divorce and the variability of earnings, particularly for the self-employed, from one year to another. Circumstances change, so that, to take a current example, a shopkeeper may find their business rates bill going up while earnings from the shop have fallen.

As the IFS warns, the appropriate degree of redistribution carried out by the state “should be underpinned by an informed understanding of how income and wealth is actually distributed. So the next time you hear a politician or journalist talk about ‘the rich’, ask who they mean.” Amen to that.