November 5, 2019
In the run-up to the 2019 UK general election, I made a website encouraging people to vote for the Labour Party. I am now shutting that site down, but have copied the posts to this site so that they can still be read.
One of Labour’s policies is to increase income tax for the people with the very highest incomes. In this article, I want to explain why I think that’s a good thing.
Income tax is the tax you pay on your income (the money you have coming in). If you have a job with a salary then that salary is your income. If you are self-employed then the profits from your business are your income. There are also other kinds of income that can be taxed, such as some types of benefits, the rent money that landlords get from their tenants, pension income, and the interest you receive on savings.
The amount of income tax that you pay depends on your total yearly income. Your total income is divided up into different sections called bands and there is a different rate of income tax on each band.
In most of the UK, the current bands and rates are as shown in the table below. Scotland has its own separate bands and rates, although they are fairly similar to the ones for the rest of the UK.
| Band Name | Band Boundaries | Income Tax Rate |
| Personal Allowance | £0 to £12,500 | 0% |
| Basic Rate | £12,501 to £50,000 | 20% |
| Higher Rate | £50,001 to £150,000 | 40% |
| Additional Rate | Anything over £150,000 | 45% |
The easiest way to understand how this works is to look at an example. Let’s look at how much income tax someone with a yearly income of £100,000 would pay.
First, their income would be split up into the bands, like this:
The Personal Allowance band covers the first £12,500 of income.
The Basic Rate band includes everything between £12,500 and £50,000. The amount of income that falls between those bands is £37,500.
The Higher Rate band includes everything between £50,000 and £150,000. Since the person in our example has an income of £100,000, they have £50,000 within this band.
The Additional Rate band includes everything over £150,000. The person in our example does not have any income in this band.
The amount of income tax that the person has to pay would then be calculated using the rate for each band.
The rate for the Personal Allowance band is 0%, so they would not have to pay any income tax on the £12,500 of income they have in that band.
For the Basic Rate band, the rate is 20%, so they would have to pay 20% of the £37,500 that they have in that band. 20% of £37,500 is £7,500.
For the Higher Rate band, the rate is 40%, so they would have to pay 40% of the £50,000 they have in that band. 40% of £50,000 is £20,000.
The person in our example doesn’t have any income in the Additional Rate band, so they don’t have to pay any income tax for that band.
The total amount of income tax that the person has to pay is found by adding together the amount they have to pay for each band. So in this case £7,500 is added to £20,000, which would give £27,500.
So in summary, someone with an income of £100,000 would have to pay £27,500 of income tax (which is 27.5% of their income). The important thing to note is that the tax rate for each band only applies to the income the person has within that band. Although the highest rate that the person in our example has to pay is 40%, they only pay this rate on the money in the Higher Rate band. The actual rate they pay overall (27.5%) is much lower than this.
One slight complication is that for people with an income over £125,000, there is no Personal Allowance, so for them the Basic Rate band goes from £0 to £50,000.
At first, this system may seem unfair. Someone with an income of £12,000 would not have to pay any income tax at all, whereas, as we have seen above, someone with an income of £100,000 would have to pay £27,500 in income tax, which is more than a quarter of their income.
Surely this places an unfair burden on people with higher incomes? Why should they have to pay a larger proportion of their income in tax than people with lower incomes? Wouldn’t it be fairer if everyone paid the same percentage?
The reason I believe this system is fair is because the effect that being taxed has on you depends on how much income you have.
People who have a very low income have to spend pretty much all of that income on the basics things that they need to survive – food, shelter, heating, clothes and so on. The income that they have may not even be enough to cover all of these needs, so they may be going without some of these things.
Someone with slightly more income might have enough to pay for all the necessities and have a little money left over to spend on things that aren’t essential but are nice to have – occasional meals out, a cheap holiday once a year, a Netflix subscription and so on.
Someone with a bit more income than that might be able to comfortably pay for all their necessities and be able to treat themselves to a few holidays a year, regular meals or drinks out with friends, expensive electronics and so on. On top of that they might also be able to regularly put money away into a savings account so that one day they can buy a house, or pay for their children’s university fees.
Then we get to someone with a very high income. This person rarely has to think about whether they can afford something before they pay for it. If they want to they can live a pretty luxurious lifestyle – going to expensive bars and restaurants, staying in five star hotels (or one of the holiday homes they own), always getting taxis everywhere. And even if they choose this expensive lifestyle they will still have a good chunk of their income left over to put into savings, or to invest in property and so on.
What would happen if all of these people had to pay the same overall percentage of their income in tax? We can easily see that although it would be the same percentage for all of them, the result would hardly be fair. As an example, let’s think about what would happen if they all had to pay 25% of the income as income tax.
For the first person, losing 25% of their income to tax would have a huge impact on their quality of life. Pretty much every penny of their income is spent on meeting their basic needs, so losing a quarter of it would leave them much worse off. They might have to go without food or heating. They might not be able to pay their rent and become homeless. Or they might be unable to pay their bills and end up in debt.
For the next person, losing a quarter of their income would not be as devastating, but would still have a significant negative impact on their quality of life. They would probably have to cut back to the basics, giving up the nice extras that they had been enjoying. Their life might become significantly more stressful as they start having to worry about making sure their basic needs are always met.
For the next person, the negative impact would be less severe. They wouldn’t be able to save as much each month, which might make it difficult for them to one day buy a house. And they might have to cut back on how often they go out for dinner and so on, but they would still be able to live a fairly comfortable life and not have to worry about having enough money to meet their basic needs.
For the person with the highest income, losing a quarter of it to tax would have an even smaller negative effect on their life. They would probably still be able to afford to do most of what they were doing before, but just wouldn’t have so much money accumulating in their bank accounts or investment portfolios.
It is also worth remembering that income tax only takes away from your income, not from the total amount of money you have. Many people with high incomes also have money in savings accounts, or invested in property or shares and so on. Some have inherited large amounts of wealth. So a 25% income tax would not take away a quarter of all the money they have, it would only take a quarter of the money that comes in.
It seems clear to me that taxing the same proportion of everyone’s income would be deeply unfair because it would have such a different impact on different people. Instead, I think a fair system is one which tries to make sure that paying income tax has roughly the impact of everyone’s quality of life. For someone with an income of £100,000, losing 25% of their income might have the same impact as losing 10% would for someone with an income of £25,000.
The Government needs money to spend on schools, hospitals, roads, public transport, emergency services, social services and all sorts of other important things. In order for the Government to be able to pay for these things it has to get the money from somewhere.
Income tax is one of the main ways that the Government raises money. Other ways include National Insurance and other taxes such as the VAT that you pay when you buy something and the corporation tax that companies pay.
In 2008 there was a global economic crash which led to a recession. People’s incomes went down which meant that the Government received less money from income tax. Companies also had lower profits, which meant that the Government got less money from corporation tax. Also, people and companies spent less money, so the Government got less money from VAT.
When the Government spends more money than it has coming in, it has to borrow money to make up for the difference. This then means that the Government builds up debt and has to spend future money paying off the interest on this debt.
The Conservative and Liberal Democrat coalition government took over in 2010, with David Cameron as Prime Minister and Nick Clegg as Deputy Prime Minister. They argued that the Government’s response to this situation should be to reduce it’s spending. They started a programme of cutting government funding for all kinds of important services.
This policy of reducing government spending is called austerity, and it has been continued by the Conservative governments that we have had ever since (under David Cameron, Theresa May and Boris Johnson). The austerity policy has included cutting funding for education, healthcare, emergency services, welfare, transport, roads, libraries, parks, housing and many other services.
These cuts to government spending have had a devastating effect on people in the UK. Millions of people have been driven into poverty, leading to massive increases in the number of people using food banks and a large rise in the number of people who are homeless and sleeping rough. Schools have had their budgets slashed and hospitals have been placed under immense pressure.
A United Nations report into extreme poverty in the UK found that the spending cuts have breached human rights agreements and have had a disproportionate effect on poor people, disabled people and women. The report described the austerity policy as “inflicting unnecessary misery in one of the richest countries in the world.”
Despite austerity’s devastating effects, the Conservative Party have always argued that these cuts to government spending are necessary, because the Government doesn’t have enough money coming in to be able to spend more.
However, there are alternatives. One obvious thing that the Government could do is increase the amount of money it has coming in by increasing the top rate of income tax. There is no reason why the top rate has to be 45%, and in fact there are many countries that have higher rates. For example, Sweden, Japan, Denmark, Aruba, Austria, Finland, Canada, Luxembourg, Ireland and The Netherlands all have a top rate of income tax which is more than 50% (and there are many other countries where the top rate is between 45% and 50%).
Increasing the top rate of income tax, which the Labour Party have proposed to do if they win the election, would raise more money for government spending by taking more from those people whose quality of life would be least affected by the extra taxation. Combined with other ways of raising money (such as increasing corporation tax and taking stronger action against tax evasion), this would allow the Government to spend the money that is needed.
A common argument that people make against increasing the top rate of income tax is that it would cause people with high incomes to move to other countries where the income tax is lower, and then we wouldn’t be getting any income tax from those people.
The reality is that the vast majority of wealthy people will not uproot their whole life and move to another country to avoid an increase in income tax. Moving to another country is a massive change. It means moving away from your network of family and friends, changing your work situation, taking your children out of school and away from their friends, and adjusting to life in an unfamiliar new location.
For most wealthy people, an increase in income tax just wouldn’t have enough of an impact on them to justify such a move. Of course, most rich people don’t like paying more tax, but the reality is that it wouldn’t have a big enough effect on their quality of life to motivate them to go through the upheaval of moving.
After all, we don’t see wealthy Swedish or Japanese people flocking to the UK to take advantage of our lower rates of income tax. Most wealthy Swedish people live in Sweden and most wealthy Japanese people live in Japan.
This common-sense argument is also backed up by the data. For example, 84% of the world’s billionaires still live in the country they were born in, even though there are plenty of countries with lower taxes that they could move to. And of the ones who have moved, most of them did so before they became rich. In fact, only about 5% of the world’s billionaires have moved countries after becoming rich. People like Richard Branson, who has moved to the British Virgin Islands where taxes are extremely low, are in fact rare exceptions. The evidence clearly shows that the vast majority of wealthy people would rather pay more income tax than move.
So it would be possible for the Government to raise a lot more money by increasing the top rate of income tax and through other policies like increasing corporation tax and doing more to stop tax evasion.
But instead of doing this, the governments that we have had since 2010 have chosen to cut government spending. And they have continued with this austerity even as its devastating effects have become clear.
And in fact, they have even reduced the top rate of income tax down from 50% to 45%.
To understand why this policy has been put in place, we need to look at who has been in power and what their motivations are.
The government that came to power in 2010 was a coalition between the Conservative Party and the Liberal Democrats (with David Cameron as Prime Minister and Nick Clegg as Deputy Prime Minister). Since that government ended in 2015 we have had a series of Conservative governments, under David Cameron, then Theresa May, and now Boris Johnson.
So why would the Conservatives (and the Liberal Democrats) rather cut vital government spending than do things like increasing the top rate of income tax?
The simple reason is that the Conservatives are the party of the wealthy. Most Conservative politicians and their friends and families are wealthy people. Also the party relies on large donations made by wealthy individuals and companies. For example, the Sunday Times Rich list 2019 reported that out of the 50 largest donations to political parties by wealthy individuals and companies, 47 were to the Conservative Party and none were to the Labour Party. Those donations to the Conservatives will only keep coming as long as they keep coming up with policies that work in favour of wealthy people.
The wealthiest people in the UK don’t want to pay more tax. And they are also the people who are least affected by austerity. If you can afford to send your children to private school, then cuts to education funding aren’t a problem for you. If you can afford private healthcare then you don’t need to worry about the waiting times at your local GP practice. If you never use public transport then you won’t be affected by a lack of investment in it.
This is why the Conservative Party keep telling us that austerity is necessary – because they represent wealthy people who would rather see public services destroyed by austerity than pay more tax.
Of course, not all rich people have this attitude. There are wealthy people who would be happy to pay more tax if it meant better public services for everyone. However these are not the people who fund, work for and run the Conservative Party.
That’s why I think you should vote for a party like Labour who are against austerity and are in favour of increasing taxes for the wealthiest people and using the money to fund the public services that we rely on.
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