Inequality and taxing higher earners

Today I’m going to write about the wealth inequality in the UK. Before I start, I should point out that there is inequality and poverty across the world that is worse and more pressing, and the UK is in a very good position compared to a lot of countries, but I intend to address that issue separately.

Here are some statistics for you showing how unequal the UK is and how this has deteriorated over time. And here is a page of countries by income inequality. If you look at the OECD countries, the UK is in the top half of income equality before tax and transfers but near the bottom after tax and transfers. This is to say that our wages, while still unacceptably unequal, don’t compare too badly to other countries, but our tax system compares very badly on equality. Here is a very interesting video. As you can see the top 20% of the population of the UK have 60% of the wealth, whereas the bottom 20% have 0.6%.

However, where there is a government shortfall, the government continue to look at making savings by cutting welfare, therefore increasing inequality further. This is something that urgently needs to stop. So what do we do to reduce the government deficit (the annual shortfall between government spending and income) and ultimately the national debt? Obviously there are many things to do. One thing we need to do is make greater steps towards stopping tax avoidance schemes from large companies such as Amazon, Google and Starbucks. This will require international cooperation but hopefully this is something that will happen eventually.

But we also need to look at the amount of tax that individuals pay and ask whether it is fair. And that is the main subject of this post. Given the inequality that exists, the national debt, the deficit and the importance of keeping public services functioning at a reasonable level, of course it is right that the rich pay more tax.

Labour have announced that they would reintroduce the 50% tax rate for earnings over £150,000. While the Conservatives and a lot of other people are against this, the people it will adversely affect are already in a very privileged position in society. It is also only what they earn over £150,000 that is affected, so they would need to already be earning quite a lot more than this for it to have a significant impact. It might be an annoyance to them, but at the other end of the scale, cuts in welfare are not a mere annoyance – they can ruin lives. This isn’t a game; this is people’s lives, so when it comes to taxing the rich a bit more, I find it impossible to feel any sympathy for them. Personally I would suggest going even further, perhaps bringing in the 50% rate on anything over £100,000 and having a higher rate over £150,000, maybe 60%.

Of course, there is a lot of speculation that tax rises for the rich would drive talented people out of the country and so would backfire. However, it is quite clear that finding the best-paid jobs is as much about opportunity as it is about talent. If people in the best-paid jobs left the country, there would be plenty of other people to take their place. Also people earning over £150,000 per year would still be very well off by anyone’s standards, so I do not believe that too many of them would go through the upheaval of leaving the country and taking their family with them, arguably out of spite.

Anything more than Labour’s proposed reintroduction of the 50% rate should probably be introduced gradually, however, just in case there were any unintended consequences. But it is something that should be tested empirically; we shouldn’t assume that it wouldn’t work in advance. Another idea worth considering is the “mansion tax” supported by Labour and the Liberal Democrats.

Then there is the argument that the highest earners already contribute the most, so it is wrong to make them contribute more. However, money is a very good invention for hiding how much people contribute and how much people take. It obscures what contribution and wealth really are. Wealth isn’t the coins you have in your pocket or the numbers on your bank statement. Wealth is far more real than that. Wealth is essentially resources and access to resources. It’s the stuff we need to live. And when someone has more than their fair share, they are depriving other people and denying them their right to a comfortable life. When people are taxed, it is not “theft” of some material possession they have, such as the coins in their pocket. The coins are just tokens indicating the amount of resources in the world that they can claim for themselves. And these resources don’t intrinsically belong to anyone.

Those that pay more in income tax do so because they take more of a wage in the first place. Although it’s not necessarily from the government (it is if they work in the public sector, however), those that pay more in income tax do so because they take more financially from society as a whole in the first place. So purely in monetary terms and looking at society as a whole (not just directly concerning the government), they are taking more wealth overall (wage minus tax) than people who pay less tax.

Obviously you can then argue that they earn more money because they contribute more through their work than people who earn less. But there’s clearly not a direct correlation here. Bankers are the obvious example but there are many others. Also at the other end of the scale, some people do incredibly worthwhile voluntary work so contribute no tax through this, but they are clearly contributing a lot to society. Financial contribution and contribution direct to the government are not the only forms of contribution that someone in society can make.

If someone works hard in a low-paid job, then they may require extra benefits from the government to provide for themselves and their family. They might then be seen as a net taker from society. Someone else might earn a lot more money or have inherited a lot of wealth, pay a lot of tax, and be seen as a net giver. But the money you earn from your job is wealth that you are taking. Someone on a low wage may still need benefits from the government, but that’s only because they’re taking such a small amount from their employer, despite possibly working as hard as anyone else. Wages are often arbitrary, and earning a lower wage doesn’t mean your job contributes less to society than a higher paid job. So if someone’s total wage plus benefits from the government is still less than another person’s wage, then they are still gaining less from society while contributing the same number of hours’ work. They may take more specifically from the government, but they are taking less wealth from the country as a whole. So overall they are arguably contributing more to society. The direct contribution someone makes is through the work they do, not through the money that goes to the government in the form of taxes. The tax someone pays is merely a by-product of what they are taking.

I’m not saying that the amount that everyone earns is completely arbitrary, of course. There are specialist skills that take years to acquire (e.g. those of medical professionals, scientists and many more), and if there was no financial benefit in acquiring these skills over taking a job that requires no qualifications, then arguably not so many people would make the effort. So I’m not arguing for a levelling out of all wealth and wages. I’m merely pointing out that those who have to pay more income tax have nothing to complain about in the grand scheme of things. And it’s not simply that we need to raise the tax rates for higher earners – we need a culture shift regarding the sense of entitlement that people have to their wealth. If you happen to be of above average wealth then lucky you, but don’t assume that those who are less well off are somehow less deserving of a reasonable life.

Reducing tax avoidance and increasing tax for higher earners are two things that can be done to raise money, but what we do with it is important. We need specific policies aimed at reducing inequality. But I think I have covered enough for one post and will address this shortly, with a discussion of the minimum wage among other things, in another post.

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7 thoughts on “Inequality and taxing higher earners”

  1. Hi Toby, I hope you’re well.
    I like the idea here of the alternative perspective of higher ‘earners’ also being higher ‘takers’, since the money they are given control over in exchange for fulfilling some agreement, is then not at the disposal of the rest of society. Thus because they have taken possession of more economic opportunity (via money), to maintain collective economic well-being it is necessary and fair for some of that opportunity to then be redistributed, through taxes. Of course the neoliberal (which both Labour and Tory are aligned with) counter to that would be the money is redistributed anyway, through whatever people do with their money, and since they earned it its their right to decide how it gets used.

    You make the moral argument against that form of distribution (‘trickle down’), that it leads to ruined lives, but too often that message falls on deaf ears. As I think you suggest, part of the problem is the whole concept of ‘earning’ money (a proxy for economic power and opportunity), and how that’s analogous to ‘deserving’ it, and hence all the benefits and privilege it brings. From that perspective those doing financially well tend to defend the status quo, even accepting some of the luck involved, as overall resulting from people being paid what the market decides their work deserves or justifies. So whatever they have is fair, and those suffering have no right to claim anything they possess from them, and must be grateful for the charity they get. This rationalization of privilege is often further backed up by the utterly delusional idea that people are equally free in the choices they make for economic health and prosperity, that their bargaining positions are equally robust and well informed, and so therefore everyone must take full responsibility for their lot.

    To really nail the fallacious and morally corrosive nature of the neoliberal doctrine down, I think it’s very helpful to get clear on the fundamental behaviour of a market based economy to concentrate economic power and opportunity to the limit, through cumulative competitive advantage, leading to effective economic slavery of the large majority, where essential resources are privately controlled. But this is not a law of nature, it is a relatively recent human construct, arising from the ability amass wealth given to us through technology, combined with the extended idea of private property. So, because markets will fundamentally always tend to that result, they are fundamentally not a good basis for a moral, efficient and collectively prosperous society.

    Practically speaking, I think there are some specific programs and policies that tie in with our existing political and economic institutions which would help put us on a path to sanity, morality and shared prosperity. Those include reforming the tax system mainly around property (not just land) and introducing an unconditional basic income. I outline the rationale for this and how it might work here:
    http://joe-hudson.blogspot.co.uk/2013/12/two-powerful-mechanisms-for-stimulating.html

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