The rich should pay more tax. I bet you haven't met many people who would disagree with that statement. Even our so-called Conservative Chancellor has recently complained about the lack of revenues coming from the nation's wealthiest individuals.
The problem is how to get the rich to pay up.
There are four great truths about the wealthy. They explain why the principle of taxing the rich will never form the basis of our tax system.
First, rich people own stuff, like companies and land, and over time these assets becomes more valuable. They don't receive wages. Taxing capital appreciation is very hard. Revenues can only be realized when the rich sell their assets, which the don't do very often.
Second, rich people often borrow large amounts of money to buy valuable assets that generates more wealth. Moreover, they use the assets they already own as collateral. Very few people became wealthy without first becoming heavily leveraged. In contrast, poor people have no assets, can't borrow and therefore remain poor.
Leverage also helps reduce tax burdens. The rich, through the companies they own, can use interest payments reduce their taxable income. Leverage also dramatically complicates tax arrangements and this confusion always favours the rich. A clever well-paid accountant, with their interest deductions and write-offs, will always outmaneuvers a poorly paid tax inspector.
Third, globally they are footloose. They may choose to live in London today; New York tomorrow, and Mumbai the day after that. If the tax rate in one country is too high, they move to another country with a lower rate.
Fourth, wealth buys political power. With pliable politicians, the rich influence the tax system, creating complicated loopholes, and as we already know, a confused and badly drafted tax system facilitates tax avoidance.
Taken together, this means that the rich are never likely to be the primary source of taxation. Over time, our tax system has come to reflect the inherent difficulty of getting the rich to pay more. Just look at tax revenues. Value-added tax and income tax are the two main pillars of our tax system. The burden of both taxes fall heavily on ordinary individuals. These two pillars are supported by resource taxes, for example those levied on North Sea oil, and penalty taxes, such as those levied on smoking, drinking and gambling. Wealth taxes contribute only a negligible amount to overall revenues.
Bereft of any easy pickings from the wealthy, the UK tax system essentially takes money from the middle-class through income tax, and from everyone through consumption taxes like VAT. Taxes are mostly a middle class affair.
The distributional aspects of government expenditure and more complicated. Some expenditures are directed towards the poor, such as unemployment benefit. Other public expenditures, such as health and education, are enjoyed by the poor; the comparatively well-off; and everyone in between.
This leads us to the irresolvable tension embedded in our system of public finances. The wealthy have largely exited the system, both in terms of being beneficiaries of public expenditures and in terms of paying taxes. The middle classes receive extensive benefits from system and pay heavily for it, in terms of income and consumption tax. They would like to see their tax burden is reduced, but they don't want to endure any expenditure cuts. The poor pay only a marginal amount of taxation, largely through VAT, but they receive significant benefits from public expenditures. They want to see more public expenditure and are indifferent to the tax burden.
This means that there is always a coalition to keep public expenditure high, in some cases, to increase it. The number of voters who want to reduce taxation is always in a minority.
So public expenditure just keeps on rising, and taxation fails to keep pace. How does the government make up the difference? It borrows. It passes the burden of paying for current public expenditure on to future generations. They are utterly disenfranchised since they don't vote and in many cases have not yet been born.
It is a dishonest system, and this is where the rich become very useful. It allows everyone to conjure up a solution that superficially seems plausible. The rich have more money; therefore they should pay more taxes. If it were that easy, it would have happened already.
The harsh truth about UK public finances is that the people who benefit from it also have to pay for it. That means us. If we want less tax then we must have lower expenditure. If we want to stop burdening future generations with large debts, then revenues must equal expenditures.
So forget about the rich. They live in a different world. They don't get much out of our current system of public expenditures. They have no intention of paying more. They have ample means to avoid tax.
The rest of us must pay. That is how it has always been, and it will never change.
The problem is how to get the rich to pay up.
There are four great truths about the wealthy. They explain why the principle of taxing the rich will never form the basis of our tax system.
First, rich people own stuff, like companies and land, and over time these assets becomes more valuable. They don't receive wages. Taxing capital appreciation is very hard. Revenues can only be realized when the rich sell their assets, which the don't do very often.
Second, rich people often borrow large amounts of money to buy valuable assets that generates more wealth. Moreover, they use the assets they already own as collateral. Very few people became wealthy without first becoming heavily leveraged. In contrast, poor people have no assets, can't borrow and therefore remain poor.
Leverage also helps reduce tax burdens. The rich, through the companies they own, can use interest payments reduce their taxable income. Leverage also dramatically complicates tax arrangements and this confusion always favours the rich. A clever well-paid accountant, with their interest deductions and write-offs, will always outmaneuvers a poorly paid tax inspector.
Third, globally they are footloose. They may choose to live in London today; New York tomorrow, and Mumbai the day after that. If the tax rate in one country is too high, they move to another country with a lower rate.
Fourth, wealth buys political power. With pliable politicians, the rich influence the tax system, creating complicated loopholes, and as we already know, a confused and badly drafted tax system facilitates tax avoidance.
Taken together, this means that the rich are never likely to be the primary source of taxation. Over time, our tax system has come to reflect the inherent difficulty of getting the rich to pay more. Just look at tax revenues. Value-added tax and income tax are the two main pillars of our tax system. The burden of both taxes fall heavily on ordinary individuals. These two pillars are supported by resource taxes, for example those levied on North Sea oil, and penalty taxes, such as those levied on smoking, drinking and gambling. Wealth taxes contribute only a negligible amount to overall revenues.
Bereft of any easy pickings from the wealthy, the UK tax system essentially takes money from the middle-class through income tax, and from everyone through consumption taxes like VAT. Taxes are mostly a middle class affair.
The distributional aspects of government expenditure and more complicated. Some expenditures are directed towards the poor, such as unemployment benefit. Other public expenditures, such as health and education, are enjoyed by the poor; the comparatively well-off; and everyone in between.
This leads us to the irresolvable tension embedded in our system of public finances. The wealthy have largely exited the system, both in terms of being beneficiaries of public expenditures and in terms of paying taxes. The middle classes receive extensive benefits from system and pay heavily for it, in terms of income and consumption tax. They would like to see their tax burden is reduced, but they don't want to endure any expenditure cuts. The poor pay only a marginal amount of taxation, largely through VAT, but they receive significant benefits from public expenditures. They want to see more public expenditure and are indifferent to the tax burden.
This means that there is always a coalition to keep public expenditure high, in some cases, to increase it. The number of voters who want to reduce taxation is always in a minority.
So public expenditure just keeps on rising, and taxation fails to keep pace. How does the government make up the difference? It borrows. It passes the burden of paying for current public expenditure on to future generations. They are utterly disenfranchised since they don't vote and in many cases have not yet been born.
It is a dishonest system, and this is where the rich become very useful. It allows everyone to conjure up a solution that superficially seems plausible. The rich have more money; therefore they should pay more taxes. If it were that easy, it would have happened already.
The harsh truth about UK public finances is that the people who benefit from it also have to pay for it. That means us. If we want less tax then we must have lower expenditure. If we want to stop burdening future generations with large debts, then revenues must equal expenditures.
So forget about the rich. They live in a different world. They don't get much out of our current system of public expenditures. They have no intention of paying more. They have ample means to avoid tax.
The rest of us must pay. That is how it has always been, and it will never change.
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UK
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