Death and Taxes

Get place and wealth, if possible with grace; if not, by any means get wealth and place.

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?

Taxes

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[1] 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:

  1. Top marginal effective income tax rate including employee national insurance / social security:
    Norway Sweden Denmark United Kingdom[2]
    % of income 46.9% 60.1% 55.8% 47.0%
  2. 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%
  3. 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.

Brexit

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[3], 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.

Notes:

  1. the rich /ðə rɪtʃ/ noun [plural] those who earn more than I do.

  2. For simplicity’s sake, let’s ignore the anomaly of the 62% effective marginal tax rate on incomes between £100,000 and £120,000.

  3. 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.
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15 thoughts on “Death and Taxes”

  1. Fascinating and inciteful post. Really well researched and written. I wonder if Scandinavians view it as a duty to pay taxes. Trump says its patriotic to cleverly avoid taxes. I think here we have a mix of the two where the general feeling amongst the lowest paid is that the rich avoid taxation. I know that’s factually not true but the general consensus is only death is certain for the rich. As someone in the middle I personally want to legally avoid as many taxes as possible and I don’t care what people think of that attitude.

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    1. In principle I don’t mind paying tax didn’t mind paying tax until the Brexit vote. The question was more about how the money was being spent rather than whether or not I had to put into the kitty.
      The referendum pissed me off. Primarily due to Leave voters’ comments about the mercenary army (with reference to London’s financial services workers), why the good people of Stoke on Benefits and similar places didn’t give monkeys about London’s dependence on the Single Market, and there was also a certain amount of glee at the prospect of some “bankers” losing their jobs.
      Well. Really? A mercenary army, you say? Fine. Sold. Henceforth I shall refrain from sowing. #notmypeople
      The hilarious thing about this entire episode is that there are so many easy and perfectly legit ways in the UK to avoid paying tax – all I had to do was take an interest, and I was able to cut my tax bill from £39k in 15/16 tax year to £22k in 16/17 year, notwithstanding my gross income going up. Look, I’m sure that eventually, even without Brexit, I would’ve started paying attention to tax, purely because it’s such a drag on the accumulation rate, but I wouldn’t have achieved such a large saving so quickly. For instance, I wouldn’t have cleaned out my emergency fund and whacked it all into a pension just so I could write to HMRC asking them to adjust my tax code. #simplepleasures 😉

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      1. I remember being on a walk with the better half and I explained to her about all these “legal” ways to avoid paying tax and she was gobsmacked that you could end up having a million stashed away in a tax free ISA which will then produce a tax free income for life. We are very lucky in this respect. We can also avoid taxes though by not owning a car, buying less shit, and generally living a more simple life.
        As for “people in Stoke on benefits”, I see the effects of cyclical poverty on a daily basis in my job as a teacher. It genuinely is a human tragedy that scumbags encourage their children to live the life that they and their parents have led. And these kids want for nothing, they have all the latest iphones & designer gear.

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        1. Pressed send halfway through…..
          They have all this designer gear because their parents probably have a lucrative side hustle, that is probably illegal, yet still sign on as though it is their right to do so, live in a DSS house and claim for this and that. Every night they get fed some shit Farmfoods/Iceland crap with chips whilst their parents chug on fags washed down with skol. They swear at teachers because their parents swear at each other. They are violent to others because their parents are violent to others. They see no stability in human relationships because their parents are trying to emulate Steve Macdonald and shag the whole estate. No child should be brought up in such a dishonest environment.
          To stop the “working” class from feeling aggrieved at the “nonworking” class I often wonder if a UBI is an answer?

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    2. Am a Brit living in Norway. Norwegian’s attitude to taxes is similar but different to UK. They of course want to minimise what they pay as much as possible and use every possible rebate, but generally they are happy to pay taxes, feel they get something back for them, and it’s both hard to dodge taxes and easy to do the paperwork (for the average person your tax return is auto filled out with all the details, bank deposits, interest income, shares, debts etc and you just need to check or amend it). The black cash economy exists but it’s smaller and looked down on and generally cleaners and the odd handyman. Physical cash is less and less common. Sure there are some big exceptions but they are likely criminals! The article here is spot on that even if you work as a waiter or checkout attendant your hourly rate is a liveable wage.

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  2. Great post!

    Once upon a time Prof Kleven taught me during my undergrad. He’s not only a great economist, he’s a great guy (shame I flunked his course…)

    I think you have it spot on when you say talk about the “Starbucks Subsidy”. I guess my view is that we’ve done a very poor job in this country in deciding what we want our tax system to do both in level of services we can afford to run and in the level of re-distribution and how it we go about doing that redistribution.

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    1. I think automation and robotics can contribute to reducing the cost of services. As for re-distribtution, the closer the median is to the average the less need there is to redistribute. I think, aside from taking care of the sick and the disabled, it has to be more about equality of opportunity than the equality of outcomes. I liked this one thing Buffet once said about how he thought the world should work: it’s a minute before you’re born and you get to decide what the world is going to be like, but there’s a catch. You don’t know who you’re going to be born as – whether your family is rich or poor, whether you’ll be able-bodied or not, male or female, the colour of your skin, and you could be born anywhere on the planet – you don’t know any of that. So what sort of world do you choose to be born into?

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  3. Excellent piece, thank you.

    On a point of information, it is a bit misleading to use the UK’s highest (45%) income tax band to make the comparison, imho. That tax band is deliberately set at a very high income level (£150k, >4x national average and more than the Prime Minister) and was designed to catch only ‘fat cats’ (in fact, 1.2% of the base). Not knowing the Scandi upper tax rates very well, I suspect that the apples to apples comparison is the UK’s higher tax rate (40%) which applies to 14% of the taxpaying population. The higher tax rate threshold was, until recently, £32k income, which is only about 1.25x average income. This is even flatter than the Danish/etc examples you cite.
    http://www.bbc.co.uk/news/business-40117521
    https://www.gov.uk/government/publications/tax-and-tax-credit-rates-and-thresholds-for-2016-17/tax-and-tax-credit-rates-and-thresholds-for-2016-17

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    1. Thanks for reading and taking time to comment 🙂
      I fear I fail to agree that income taxes in the UK are – by any definition – flatter than in Denmark.
      Aside from the fact that UK’s higher rate threshold in 16/17 year was not £32k but rather £43k (you have to add the personal allowance) and the question as to whether or not £150k is enough to qualify as a fat cat in London, in the UK those who pay the additional rate (as you say, 1.2% of the tax base) contribute more than a quarter of the country’s income tax take. That’s hardly what one would call incidental. In fact, it’s a lot of tax revenue from relatively few people, which is exactly the point I was making 😉 .

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      1. thank you for clarifying that the additional rate kicked in at £43k. I knew £32k sounded too low but thought if .gov.uk says it then it must be true…. but even £43k is only 1.6x average income so it is still in line with the Scandis.

        I take your point about 1.2% paying >20% of taxes but my hunch is that in Scandinavia the top 1% also pay >20% of taxes.

        From personal experience the entrepreneurial Scandis who have done well have all got Ltd companies (‘Ab’s) in which they keep their wealth. Whereas fewer UK entrepreneurs have Ltds for their personal dosh. So the personal tax data will be a bit misleading in any case.

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