The UK’s Financial Times has just published a letter from 20 economists demanding that the 50p in the £ top rate of tax in the UK charged on those earning more than £150,000 a year be abolished. These eminent people tell us that: “the fragile state of the UK economy” requires it. Apparently, cutting the rate of tax for those reaching £150,000 a year in income (and remember this rate only applies to that part of income that is above that level) will help restore economic growth in Britain – but not investing more, not cutting taxes for the poorest working families, not reversing cuts in public spending or the reductions in public services. No, just cut the top rate of tax for the richest earners.
What rubbish! First, the UK rate is not among the highest in the OECD. According to the OECD, there are at least six other countries with the same or higher top income tax rate: Austria, Belgium, Denmark, Japan, Netherlands and Sweden. And what’s more, the UK rate only applies to the top 1% of income earners or 328,000 people. So it applies to people who earn at least five times the average gross wages of an adult full-time worker in the UK. The top rates in these other countries are applied to income earners on way less than that multiple of the average. In the case of Denmark, Belgium and the Netherlands, it applies to all average income earners.
So, in no way is the UK personal top tax rate out of line. On the contrary, it is very mild. Moreover, the UK is not a high personal tax economy that would dissuade all these rich people from coming here to help us out with their great skills. If that were true, why don’t all the rich Scandinavians come here as our top rate is lower than theirs! They don’t because even rich people don’t decide where to work or live just on some top rate of tax.
Again, according to the OECD, the average personal income tax rate in the UK is 25.5% for a single person with no children and 24% for a one-earner married couple with two children. There are 12 OECD countries with higher rates for single earners and ten for married couples with children. When all sorts of local and central taxes on labour income are included along with social security payments, the average wage earner in the UK pays 37.5% in taxes. That compares with 35.2% in ‘low tax’ America. But the rate is higher in Austria, Belgium, Czech republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Netherlands, Norway, Portugal, Slovakia, Spain, Sweden and even Turkey! Where Britons pay much more is in VAT, petroleum tax, transport fares, airport charges and utility bills. And remember, many of those countries paying higher taxes get much better public services and benefits by paying more.
Moreover, all the economies with a higher top rate of personal tax than the UK are growing faster, not slower (even Japan if you exclude the effect of the earthquake and tsunami). And all of them have higher living standards by any way you want to measure it. So it seems that a high rate of personal tax for top earners is no dampener of growth or living standards.
The reality is that the most of the rich people in the UK, as elsewhere, are not even subject to this tax as they ‘earn’ their money through profits from their companies, dividends on their shares, or capital gains or interest on their investments. They don’t ‘earn’ much from actual work. Most of these top income earners are either bankers who also get huge pension contributions and share options, so that actual wages are a small part of their annual ‘compensation’. Others are the so-called fat cats in the top echelons of the public sector (heads of the national health service, schools and colleges and various government agencies and political departments). They should be paying more tax, shouldn’t they? And are any these groups of ‘talented people’ really desperately needed to get the UK economy going?
The demand for a cut in the rate for the top 1% of British income earners is just so much greed and hogwash.