This is the second article in a series of two. Read the first here.
The last article considered how the tax system favours the wealthy. Here we consider who is really supported by the system. Although we do have wealth taxes in the UK, by and large, these suffer much lower rates of tax. And the result is that every year, with no questions asked, the government effectively gives every very wealthy person a sum equivalent to the top rate of Universal Credit.
Inheritance: passing it down the generations
Although Inheritance Tax is very unpopular, around 95% of all people who die in the UK do not pay any. That is because they do not have personal estates above the allowance threshold of £1,000,000 for a couple. And there are also massively generous allowances, especially on business property and farming.
That means that wealth can pass from generation to generation at low rates of tax, and if you give away your wealth seven years before you die, there is no inheritance tax charge at all. This makes the actual effective rate of tax on wealth in the UK something like 4%.
Who is most heavily taxed?
This chart shows the tax paid by each ‘decile’ of the population (i.e. dividing the population into tenths, from lowest to highest income).
The blue columns are the overall rate of tax on income, using data from the ONS Household Income Survey. It includes, not just income tax and national insurance, but also taxes such as VAT, excise duties, corporation tax etc, to give a feeling of the total tax burden that a household will pay.
The orange column adds income from wealth. As we explained in the first article, income from wealth is taxed much more lightly (through inheritance tax, capital gains tax and stamp duties), so the overall effective tax rate paid by people with high wealth is lower.
It is clear that the people in the lowest income decile always have the highest overall tax rate. That is because there are so many indirect taxes, paid not on income, but on consumption. These form a much larger proportion of the expenditure of the poorest. So, booze, VAT, fuel duty, council taxes, if they pay them, the BBC license fee, and all those other things, hit them disproportionately hard.
Taking into account the increase in people’s wealth as well as income, we see that the overall tax rate falls steadily from the poorest to the richest, because most of the wealth is owned by the wealthiest people, and they benefit disproportionately from tax relief on that wealth.
Tax relief for the wealthy
The wealthy also benefit in other ways.
- Pensions. If you pay into a pension, those contributions are not included in your taxable income. This costs the UK government £70bn a year in lost tax revenue. That includes the total cost in loss of income tax, national insurance, corporation tax and tax due on the increase in the value of pension funds. The vast majority of that goes to the wealthy
- ISAs. Tax relief on ISAs costs around £9 billion a year in terms of tax foregone by the government.
- Capital gains tax is not charged on the increase in the value of people’s homes, which costs around £30 billion a year.
So, how much of these reliefs go to which group? As the table shows, the answer is, mostly to the richest. The people in the top decile receive 40% of all the pension relief, a third of the relief on the sale of domestic properties, and half of the ISA relief. Ironically, the ISA policy which was meant to encourage small savers, in fact provides a massive bung to the wealthy.
Who is the government really helping?
The total value of relief given to the top 20% of wealth owners in the UK is £67 billion a year. And on average, a person in the wealthiest decile gets tax relief of over £8,000 a year.
£8,000 a year is close to the top rate of Universal Credit, or Personal Incapacity Payment. The struggle that people have to go through to get those benefits is huge: all the wealthy have to do to is simply fill in a tax return.
So the state not only gives as much benefit to the wealthy as to the most desperate: it makes it easier for them to get it.
Subsidising growing wealth
If you want to know why the wealthy are wealthy, it’s quite simply because the government (us) is subsidising them. The tax system continues to be rigged in their favour, at a staggering cost to the rest of us. It’s no wonder that people are angry.
These articles are based on a blog by Professor Richard Murphy, who has been writing on tax issues for many years.
The original text, and other material on these issues, can be found here.
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