Friday, 31 August 2012

Thoughts on Autumn, and tax...

There's an incredibly autumnal feel to the UK on the last day in August. Sunny, a good bit colder, while the first leaves are falling. Dartmoor is bright but wet. The mardle is much bigger than it usually is at this time of year. Most of the big shots in the central banking community are in Jackson Hole, Wyoming.

Here's a world to imagine...

In the UK, in 2008, pre-crisis, the top 10% of earners received £313bn in income, out of a total of £870bn. They paid income tax of £ 88.5bn, out of a total of £163bn.

In 2012, post-crisis, this same top 10% earned £293bn, out of a total of £ 873bn. They paid £85bn in income tax out of a total of £154bn.

What does this mean? Between 2008 and 2012, total income in the UK increased by £3bn, but total tax fell by £ 9bn. the top 10% saw its income fall by £17bn, but it's tax bill fell by only £3.5bn. The average tax rate on this group rose from 28% to 29%. The other 90% of the workforce saw a £23bn increase in incomes, but a £5.5bn fall in tax. And a tax rate that consequently fell from 13.3% to 11.9%.

This is 'just' the income tax side of the equation. total income in 2012 of £873bn, is only a little over half of the  £1.56trn in GDP. And £154bn in taxes is an even smaller fraction of the £687bn the government spent in the last fiscal year.

But what the data do show, is how a recession affects different groups.

The pre-tax income of the 'typical top 10% earner' if such a person exists, fell from £120,000 in 2008 to £113,000 this year. His/her post tax income has fallen from £86, 500 to £80,000. The 'average bottom 90%'  non-banking non-footballer, had a pre-tax income of £ 23,800 before the crisis, rising to about £25000 now. His/her post-tax income has increased from £20,600 to £22,000.

In any system where some earn more than others, and where there is a desire to ensure that a minimum amount of income as well goods and services (schools, hospital, roads, you name it) are provided to everyone, a major economic shock will increase the burden on the well-paid. Their incomes will fall and their share of the tax burden will go up. And so it is that in cash terms, 90% of the people employed are richer in cash terms than they were four years ago, even if they feel poorer, while 10% are without a shadow of a doubt poorer however you look at it.

Both sides of this argument are going to feel aggrieved. The well paid will reckon that they are already paying more, even as they earn less, and won't like to be told they must pay more to contribute their 'fair share'. The rest will see 10% of the population earning four times as much on average as the other 90% and reckon it is only right and proper they should carry the burden of any additional hardship. And then someone will talk about wealth.... I'm not sure I have a strong view on the morality of the issue and what is 'fair'. But I am sure that the outcome of recession will be further increases in the tax burden on the well-paid, because there is no alternative. You can only tax those who earn and there are clear limits to how much spending can be cut in a democracy where we are all used to the benefits of public schooling, health, and policing.  The answer is to grow the economy, because if total income is growing, you can more easily  provide a better level of service for everyone. But that's obvious in principle and elusive in practise!

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