Can we soak the rich? by Simon Sweetman

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Last week's Budget announcements were not so much a soaking, more a light shower for the wealthy. But is there more of the same in store, and what revenue will it raise? Simon Sweetman is on the case

The Institute for Fiscal Studies has posed itself the question Will income tax changes for the very rich raise any money ? and produced a research paper which attempted to answer it.

It looked at the proposal to increase the higher rate to 45% for those with incomes exceeding 150,000 a year from April 2011 which will now be 50% from April 2010. Now this is hardly squeezing the rich until the pips squeak, as Denis Healey didnt say, since the starting point here is approximately six times the average...

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Only 98%?
Surely there are wrinklies like me around who remember tax rates exceeding 100%. There was the 10% surtax surcharge in 1972-73 and the special charge in 1967-68. They were of course wealth taxes in disguise. But I have no personal recollection of the wartime Excess Profits Tax!

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The morality of high tax rates
I can remember a marginal tax rate of 98%.

Yes, earn £100 of interest and £98 goes to the Government and you got to keep just £2.

The phrase "state confiscation of assets" comes to mind in this context in modern day humans rights terminology.

This was in the days of a top income tax rate of 83% on top of which Investment Income Surcharge was 15%. This was in the 1970's

So next year's 50% income tax rate seems rather mild in comparison.

I personally believe that any marginal tax rate above 50% is immoral - can it really be correct that more than half of the fruits of one's labour are not retained ?

So on this basis, the top rate of tax Income Tax on earned income should be no more than 49% (as there's a marginal 1% employee NIC on "high" earnings).

With regard to the concerns of remote working in a low tax jurisdiction to avoid 50% UK tax, the way forward would be to tax electronic services on the recipients of those services - not by VAT, not by IPT, but by ECT (electronic communication tax).

ECT would be levied if a UK multinational were to buy in electronic supplies from an artificially low tax rate area. Taxation of this sort would require EC wide co-operation.

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Tax advice to high earners
Is there currently a thread running on the advice that accountants should be giving to high earning clients? This seems a very risky area for advisors given the anti-forestalling measures and the consideration of the previous two years income levels and the rumoured restriction if the company makes the contribution instead. The wrong advice could easily be given by us to our clients. Any links to external documents would also be helpful.

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There's no such thing as tax avoidance
Mr Sweetman persists in the HMRC originated obfuscation concerning Tax Avoidance.
There is and can be absolutely no such thing.
One can arrange ones affairs within the law to minimise the predations of the state - or one can break the law, which is evasion, illegal and a bad thing.
I'm a Tax Avoider:
I use my Tax Code, I buy ISAs, I claim for some Professional Bodies subs . . .
I suspect 100% of taxpayers are tax avoiders in this sense - they obey the law, take advantage of the benefits it offers - and whats wrong with that.
The 'ethical' argument falls down in the face of the duplicitous and reprehensible tendency of HMRC to try to retrospectively re-interpret 'settled' understandings and their consistent misdirecion of tax-payers through the labyrinthe.
To preach that it is ethical for HMRC to behave like this and unethical for the wealth creator to not roll over seems to me an abrogation of respect for 'The Law'.

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Is there any objective definition of "rich", or does it simply mean someone who unfairly earns more than I do?

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Are the IFS an independent academic body or something? Can I ask how they are funded. Who is paying the piper and presumably calling the tune?

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Squeeze the Pips (without Gladys Knight)
Paul Johnston is correct in his point about WASTE. As a candidate in the last 3 General Elections, I have pointed this out. At a hustings debate for the 2005 General Election (as an INDEPENDENT) , I OBJECTED to the National Insurance "surcharge" as I feared it would be wasted. The audience warmed to this unusual stance - but the (local) press failed to grasp the point.

Paul's additional point about gardeners (and house cleaners, etc) reminded me of an article that I read in the London Evening Standard written by Neil Collins (around 1977?) when, after Denis Healey, (the then Chancellor who had to go cap-in-hand to the Interrnational Monetary Fund) had jacked the Rate of Taxation up to 98% (83% top rate PLUS 15% Investment Income Surcharge) resulted in a Lord of The Manor collaring a Treasury Official at a party with the words: "do you realise that I have to earn £100,000 so that I can pay my gardener £2,000?". The journalist observed that "it was the first time that [he] had seen a Treasury Minion rock on his heels".

And by the way, the Kinks wrote "Sunny Afternoon" with the phrase: "The taxman's taken all my dough".

Enterprise is good. But fleecing the golden goose isn't. I commend my website:

for a visit.

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The govt. may be expecting the lower 6 figure people to provide most of the revenue but remember that for every £1,000,000 earner who leaves the UK you need 40 earning £250,000 paying the extra 10% to make up the difference.

With modern telecommunications it's easier for the £1,000,000+ earners to operate from lower tax juristrictions so the incentive to re-locate or not come to the UK in the first place is very real.

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No Vernon they don't. They say they are doing it because they want us to change their behaviour but in fact they are aware of a basic economic principle which says that you levy indirect taxes on goods whose demand is inelastic ie demand is not very sensitive to price. Smokers will tend to carry on buying cigarettes regardless of price because they are addicted - so it makes a good target to tax. Wrap that up in a spurious health justification - even better.
Ditto petrol - where we now have the environmental justification.

And as the realistic options for someone with just earned or pension income to take steps to reduce a higher rate liability are pretty limited (unless they are a director of their own company) - especially if they actually want or need to spend all that income - they can be pretty sure they will collect that extra tax. The super super high earners may be able to do something but the government will be counting on those in the lower end of the 6 figure bracket to be the ones who pay up.

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Changing behaviour
When the Government puts up some taxes, say tobacco, it explicitly wants us to change our behaviour. But when it puts up others, say income tax, it apparently doesn't want us to change our behaviour.

I don't think they can reasonably expect to have it both ways.

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don't foget that a tax on the "rich" can also be a tax on the lower paid. When you increase taxation at the top the rich will need to reduce outgoings so they cut back on gardeners, house cleaners etc.

These occupations have already been hit by the "Credit Crunch" so now the Chancellor wants them to suffer more.

A much better approach as we all know is to save the extra revenue that might be generated by taxatio by having a more cost effective run Government. But that is just beyond those those in charge. What about CPDs for Ministers!

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£150,000 is nice, but doesn't make you rich
Ok, I'll admit I would love to be earning £150,000 p.a. But it is far from making you rich. I bet those who do earn this much spend nearly all their income the same way as the rest of us who earn significantly less. The old story of spending rising to match income.

Why do governments think it a good idea to increase taxes for people who earn more? High earners are not in these positions because they are greedy or ruthless, but because they are successful at what they do. Therefore the message is if you are successful we will punish you with higher taxes. This is a big disincentive to success, and as history has shown is destined to failure.

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Only half the story
The other aspect is the effect on foreign entrepreneurs who might otherwise have come to the UK to set up businesses and create jobs. Of course many of these will have been put off by last years attack on non-doms, but you never see this aspect analysed e.g. in the self-serving drivel put out by the Treasury last week.

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the rich?
this is a loaded political debate, but surely if you are going to talk about "the rich" you should talk about wealth rather than income?

in fact, although you don't seem to acknowledge it, what you are talking about is the Laffer curve, which is an economists model. And as such would not directly concern itself with the mechanics of taxation, but rather the effect of raising marginal tax rates on tax take.

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