They say I won’t be able to take it with me. I say it’s a rebuttable presumption, and even so, I hope it will be a few years yet before the disposition of my assets after my demise occupies more of my headspace than trying to figure out how they’re going to turn back that dead ice dragon in Game of Thrones. Surely they’re not going to perma-kill Viserion, right? … Right?
The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing.
— Jean-Baptiste Colbert
I’ve been lately contemplating on tax. This year my income tax and NI will come to £37k or thereabouts, which is more than double the amount of my annual expense budget, including mortgage interest. Add to this number the council tax, VAT, IPT, alcohol duty, airport taxes and import duties, and it soon becomes apparent that I render unto Caesar three times more than I expend on my own worldly pleasures.
This begs the question: what the fuck?
And why, even with me paying this amount of tax, do I keep hearing about the country’s finances being a mess, teachers, doctors and policemen overworked and underpaid, and don’t even start me on the infrastructure. How do Normandy and Brittany afford their acres of marina moorings – mostly public property owned by local communes – when my council in London has to economise on garbage removal?
The Scandinavian model
No discussion about income tax goes far without some social justice warrior pointing out that top marginal tax rates are higher in Scandinavia. If we only taxed the rich more, then all would be well and good.
I find it funny hearing people, some of whom haven’t even been to Scandinavia, speak of The Scandinavian Tax System as if they knew what they’re talking about. Also, Scandinavia is a geographic region – not a nation. Here’s a crash course: Norwegians can be eccentric at times; they mostly keep to themselves. Danes are a little fatter and louder than the rest, but generally good fun. Swedes are alright, and just so we’re clear, Finland and Iceland are not in Scandinavia.
Going back to tax, personal income tax rates in Sweden and Denmark are higher than in the UK, and the Norwegian top marginal rate is 0.1% lower than in the UK. Yet all three Scandinavian countries raise significantly more tax revenue – both as a percentage of the GDP and the share of the aggregate tax take – from individual income taxes than the UK does. That is because tax rates are not the most important feature of these countries’ tax systems. Their tax takes are high because their taxes are quite flat: they tax most people at high rates, not just the taxpayers in the top income decile. Below are some numbers from OECD Data and OECD Stats that help illustrate this point:
- Top marginal effective income tax rate including employee national insurance / social security:
Norway Sweden Denmark United Kingdom % of income 46.9% 60.1% 55.8% 47.0%
- Tax revenue raised from individual income and payroll taxes, including national insurance / social security:
Norway Sweden Denmark United Kingdom % of GDP 21.2% 27.9% 24.7% 15.3% % of total tax take 55.7% 63.3% 53.8% 46.2%
- The level of income at which the top marginal tax rate kicks in:
Norway Sweden Denmark United Kingdom Times the average wage 1.6 times 1.5 times 1.2 times 4.1 times
So the next time you hear someone pipe up about taxing the rich like they do in Scandinavia, please feel free to point out that if the UK were to adopt, say, the Danish model, this would mean that all income over £43,885 (1.2 times the average wage of £36,571) would be taxed at the top rate of 55.8%. There’d be no tax free allowance, income up to £5,400 would be taxed at 8%, after that the basic tax rate would be about 40%. Also, Denmark is the only Scandinavian country with inheritance tax; spouses are exempt, by everyone else pays a flat 15% on any inherited property over £33,500.
I’m not suggesting that if Britain adopted the Danish (or Swedish, or Norwegian) tax rules, that would be a bad thing. The country needs a broader tax base. And we’d get a lot in return – free universities, free healthcare, very heavily subsidised childcare and aged care for most, free for those who pass the means test. I could get decent and affordable moorings for my retirement yacht … it’s preferable to an allotment.
No welfare state without a welfare society
However, in practice, the Scandinavian model may be difficult to replicate. Henrik Kleven in his 2014 paper demonstrates what we kinda already knew. Social attitudes matter. In Sweden the rich, however defined, don’t to support the welfare state. The society pays for its own welfare through taxation: everyone pays a lot, and those who can afford to pay more do so, generally without excessive hissing.
Socialism, just like democracy, works better on a small scale; when it comes to spreading the wealth, it helps to have a relatively small, homogenous population. People are happy to chip in to help out us, not so much them. Social welfare without social cohesion is a real hard sell – that’s one of the reasons why polarising events (see: Brexit) aren’t good for the welfare state, nor are polarising politicians (see: Corbyn).
The Starbucks subsidy
When it comes to personal taxes, the UK is running concentration risk: 50% of income earners pay 90% of all income tax, 40% pay none, and 1% – about three hundred thousand people with incomes over £160,000 a year – are responsible for 28% of the tax bill. Three hundred thousand people is the population of Wandsworth.
As for the 40% who pay no income tax at all, I submit it as my opinion that it’s a mistake to have working people pay no income tax. All that it accomplishes is cut the payroll bill for low wage employers, e.g. in hospitality and catering. I call it the Starbucks subsidy. People work for net pay, not gross, so personal income tax is largely borne by the employer, but for those who distrust the invisible hand of the market, there’s a tool called the minimum wage. It should be set at such a level that a person with a job is able to both live himself and contribute towards supporting the young, the old, the unlucky, and those who are unwell.
There also should be a link between public spending and people’s own purses. How else can we claim that we as a society together decide how our money is spent? Anything other than this is merely a gimme-more-of-yours, which is both unhealthy and unsustainable.
The wage gap
It all boils down to one main question: can we have a welfare state with a low-wage economy? I say we cannot. One or the other has to give. By OECD standards, the UK’s average wage is not that low. And yet 40% of people don’t earn enough to pay income tax. If we’re keen on keeping the welfare state intact, then the median wage needs to come closer to the mean. The minimum wage has to go up, and all working people have to start paying tax.
Would there be job losses? Yes. But would it really be such a bad thing? At least then we’d be able to identify the people in need of re-trainign and redeployment. Perhaps then the productivity would finally begin to improve. The UK has had a productivity problem since the 50s, and any economist will tell you that productivity growth is the only way of ensuring long-term prosperity.
Widening the tax base is doubly important now that we’ve effectively terminated the lease and served an eviction notice to foreign capitalists who, until Brexit, have been using Britain to gain access the European single market. This New York Times article explains why, but if you don’t fancy reading it, here’s the gist:
The UK’s favorable financial and legal environment helped draw foreign capital. But it was access to the EU that allowed this to happen on a large scale. Since the early 1980s, leading global corporations have located plants and offices in Britain, sometimes taking over British businesses in the process, using British soil as a terrestrial aircraft carrier to assault the single European market. Trade figures for the past three decades show with brutal clarity how dependent the UK is on this aircraft carrier status, and how much it stands to lose if a full Brexit is carried out.
In the City of London quite a few of the 300,000 people who pay 28% of income tax depend on foreign – mostly American – capital. Some of these people are foreign-born, and some are not. Regardless of their place of birth or the location of their client base, they pay taxes in the UK, which help support the NHS and other public goods.
Pos-Brexit, their jobs will not move to the continent immediately: people and their personal situations are complex, companies want to retain good performers, also, there aren’t enough people in the EU-27 with the right skills to take them. But as people relocate, resign and retire, eventually these jobs will follow the capital which they service, and so will the tax revenue. Britain needs a plan on how it’s going to replace this revenue. Broadening the tax base could be an option, if only we had a political party with the cojones to do it.
the rich /ðə rɪtʃ/ noun [plural] those who earn more than I do.
For simplicity’s sake, let’s ignore the anomaly of the 62% effective marginal tax rate on incomes between £100,000 and £120,000.
- immigrant /ˈɪmɪɡr(ə)nt/ noun a foreigner living in Great Britain. As distinguished from expat.
expat /ɛksˈpat/ noun a Briton who lives in a foreign country.