Are too many people paying higher rate tax?

Ben Chu

Two Tory lords are a-moaning about tax.

Lord Lawson and Lord Lamont (two former Chancellors to boot) say that higher rate fiscal drag (whereby politicians do not lift the tax thresholds in line with earnings) is unfair.

Backed, unsurprisingly, by their party’s tax-cutting wing,they suggest George Osborne should be looking to raise the threshold on the 40p rate to ensure that only “the rich” pay the levy in next week’s Budget.

Do they have a case?

It’s certainly true that the number of people paying the higher rate of tax has swelled since (then) Nigel Lawson slashed the top rate from 60p to 40p in 1988. It’s gone up from 1.35 million to more than 4.4 million this year.

But it doesn’t follow from this that the tax burden on these individuals has somehow become excessive in the intervening years.

As Jonathan Portes of NIESR explained in a superb blog for this newspaper a few years ago, it’s absurd to look at income tax incidence in isolation from the rest of the tax and benefits system. For a start, income tax constitutes less than a third of the government’s total tax take. What about National Insurance? What about VAT etc?

Every year the Office for National Statistics looks at household incomes pre-and post all taxes and before and after accounting for all cash benefits. It also breaks this down by decile of population. Data available here. This is the best way we have of measuring the total tax burden across the income spectrum.

Now this data is for households, rather than individuals. And income tax is levied on individuals. But looking at original household wages and salaries etc from the dataset gives us a rough read across. With the higher rate kicking in on earnings about £41,450, the lowest possible household income decile these individuals could be in would be the eighth highest. In fact allowing for dual earning households etc virtually all will be in the ninth and top deciles.

With that in mind, here’s the tax burden from the most recent year:

tax1 Are too many people paying higher rate tax?

What this suggests is that people in the higher rate tax band pay a similar share of their gross household income in tax as the rest of the population, around 35 per cent. Slightly more than some lower income groups, but hardly excessive. As the chart shows, the very poorest decile pay a massive share (43 per cent) but that figure should be treated with caution given many are not in work and receive other substantial benefits in kind.

What about over time? Has the total burden of higher rate tax payers been rising since the Lawsonian glory days of the 1980s?

Again, the ONS data suggests not:

tax2 Are too many people paying higher rate tax?

What we see is that the top three percentiles of households by income (which, as in 2011/12, sweeps up all higher rate tax payers) have a lower tax burden than in the early 1980s, despite the higher rate fiscal drag. Their burden has roughly tracked the national average. The burden of the top 10 per cent is slightly higher than it was at its 32 per cent nadir in 1990, but it’s hardly shooting into the stratosphere. And, as is clear, the tax burden on the richest ten percent in that year was well below the rest of the population’s.

Is that the kind of tax “fairness” these Conservative peers would like to see us return to?

So, next time you hear someone moaning about too many people paying higher rate income tax and bemoaning the iniquity of fiscal drag – remember that income tax isn’t everything.

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  • Pacificweather

    So, you believe women should be penalised for working Ben. More women work and more women earn higher salaries than in the 1980’s but never mind, let’s compare family incomes. Still, it is good to know that the 2nd and 3rd worst Chancellors since WW2 think the lower middle class should keep more of their income. It is a shame they don’t think that companies whose fulfilment is in the UK should pay their corporation tax. Ask Norman when he is going to give us our £7billion back.

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