Tag Archives: income tax

Reducing inequality and poverty

I stated in my last blog post that we need to tackle inequality in the UK. I suggested that we could start by increasing income tax for higher earners. There is a lot of disagreement as to whether this is the best way to raise funds without it backfiring in other ways, and there are other suggestions that could be worth considering such as a tax on land value along with a decrease in income tax and other taxes. Empirical research and comparisons between different countries is always required, rather than mere guesswork of course. There are two distinct problems: what we want to achieve, and how best to achieve it. What we need to achieve remains the same: reduce poverty and inequality. How best to achieve it is an open question, but my proposal last time was fairly conservative in that respect: a gradual increase in income tax for higher earners, starting with a 50% top rate on earnings over £150,000 a year, which we had until 2013 anyway. If this doesn’t have the desired effect, then of course we would have to look elsewhere. This isn’t about ideological policies; we need policies to achieve what they have been put in place for.

In any case, there is much more to reducing inequality than higher taxes for those on high income. We can start with an increase in the minimum wage. It has long been said that the minimum wage is not enough to live on. The minimum wage is currently £6.31 an hour for those aged 21 and over, £5.03 for those aged 18 to 20, £3.72 for those under 18 and £2.68 for an apprentice under 19 in the first year of level 2 or 3 apprenticeships. According to the Living Wage Foundation, the living wage is £8.80 an hour in London and £7.65 an hour for the rest of the UK. The minimum wage seems not to have kept up with increases in the cost of living. It should also be the same for everyone, regardless of age. Ageism is no more a valid prejudice than any other.

Obviously those on the minimum wage need enough to live on. If those on it can’t afford to live properly, they still have to claim benefits from the government. But rather than seeing these people as a burden on the state, arguably a more appropriate interpretation is that tight-fisted employers are effectively claiming off the state to subsidise the wages they have to pay. An increase in the minimum wage will go some way to prevent this. Those out of work also need enough to live on. I would argue that anyone out of work should automatically have the opportunity to work for at least the minimum wage by doing work in the community, which could include litter picking or visiting and helping elderly people who live on their own.

I would also look at a maximum ratio between the top and bottom earners in a company. Switzerland had a vote on a 12 to 1 ratio last year, and while it was rejected, I think it is a good idea in principle. It would root CEOs’ salaries in something meaningful. Instead of awarding themselves whatever they like, they would only be able to award themselves a certain percentage rise if the company could afford that percentage rise overall. This is something that could be written into legislation, although the exact ratio would need to be carefully considered. The wage ratio between those at the top of companies and typical workers has increased dramatically over the last few decades. According to a report by Bloomberg, the average ratio has gone from 20 to 1 in 1950 to 204 to 1 today. Wagemark is a not-for-profit organisation that certifies companies that have an 8:1 ratio or lower between the highest earners and the average earnings of the lowest 10%. This and the suggested Swiss 12 to 1 ratio are fairly close together and would probably be around the right ballpark to be looking at.

Increasing the wages at the lower end of the scale would reduce the need for the state to provide benefits. But there are also other ways. By providing housing benefits, the state is effectively paying money directly into the pockets of private landlords. This is why we need more state-owned accommodation, and/or proper enforceable pricing brackets for landlords based on considerations such as size of property and the facilities it has. This would save money in the long term. Furthermore, landlords can and do currently discriminate against those on benefits, whereas it could be made unlawful to do this.

We need proper government targets on poverty and inequality – targets that will be met.  And this means that politicians and the media would have a responsibility to report statistics relevant to these. Since the economic crisis started in about 2008, two of the main economic statistics we have about from politicians and the media ever since are the government spending deficit and economic growth. I’m going to briefly talk about these statistics.

The term “deficit” was not in everyday use by ordinary people in 2008, and most people probably didn’t know what it meant. It was never introduced to us properly, and politicians and the media bandied it about like we should know what they were talking about. The deficit is the annual shortfall between income and spending. This is distinct from the national debt, which is the overall amount that the government owes. So when the government says that it has halved the deficit, this doesn’t mean that things have improved. It just means that they are getting worse at a lower rate. It’s indicative of the obsession with rate of change of a thing rather than the thing itself.

This brings us nicely to the size of the economy. It rarely gets talked about in absolute terms; it’s all about whether it’s growing or shrinking. If it’s shrinking (specifically if it has shrunk for two consecutive three-month periods), then we’re in recession and apparently that’s a really bad thing. Intuitively, the absolute size would be more important. The economy could grow for ten consecutive years, and we’d be hearing about how great everything is. Then it might shrink to the level that it was after nine years (so one year previously) and we’d be in recession. But we’d be in the same position (by the seemingly relevant measure) as we were at a time when everything was considered to be really good. Of course, I am simplifying matters, but merely stating that these are the important statistics without any explanation is, to my mind, irresponsible and lazy.

In any case, I’m not saying that we should never hear about these statistics, but more important to us is surely wealth of individual citizens and households. Statistics such as median and mean wealth and how these have changed over the years (both the thing and rate of change of the thing) would be a good start. But I’m here to talk about poverty and inequality. So we need statistics relevant to these, and these statistics need to be as well publicised as the deficit and economic growth. It doesn’t help if the economy is growing if the extra wealth is just going to those who are already rich, further fuelling inequality.

We could use the average wealth of the poorest 5% as a figure for poverty. For inequality, I think it’s slightly more complex. There is the distribution of wealth by Gini coefficient, but we could also look at simple ratios such as average wealth of the richest 5% compared against average wealth of the bottom 5%. But whatever statistics are used, they need to be official government statistics with official targets, and they need as much coverage in the media and by politicians as economic growth and the deficit.

Meeting these targets would not simply be a case of handing out massive benefits to the poorest and leaving it at that. Doing this could encourage others to give up work on the basis that they too will get these massive benefits. And the less work that gets done, the less wealth there will be, which could ultimately lead to a reduction in the wealth of the bottom 5%. It would need to be a sustainable system. There would be long-term targets to stop self-defeating policies. We can’t know exactly what will work without experimentation, but the suggestions I have made here seem a reasonable start. We also need to be scientific and see what actually works. We can start by looking at inequality in other countries and what policies seem to reduce it. This is not just about wealth; people’s health is at stake.

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.