In the run-up to the budget, I have seen claims that as many as one in five people are planning to leave the UK because taxes are too high. If they are, they’re in for a shock. The well-off and the wealthy get a great tax deal in the UK that they’re going to find hard to replicate anywhere else.
To be a little more precise, look at this chart.
This is based on Office for National Statistics (ONS) data for the years 2010 to 2020: after the global financial crisis and before COVID hit. It was a decade when economies were relatively stable.
Tax on income
The chart divides taxpayers into deciles with each decile representing one tenth of all taxpayers – so about three million people in each. Using official data, I worked out the likely effective tax rate on the income of people in each decile.
Up to around the 80th to 90th decile, people are earning £50,000 a year or less. It’s only the top decile – the top 10% – who are earning £80,000 and more a year, with some of them earning extraordinary amounts.
The lowest group of earners are outliers. Their tax burden is very high: around 44% of their income. This is because, with very low incomes, they pay little or no income tax. But they pay a lot in taxes on the goods and services they buy, and they tend to spend all their earnings.
After that group the distribution of incomes is more consistent. For those who are on low incomes, the effective tax rate is just over 30%. That includes all taxes paid – including council tax, VAT, National Insurance, alcohol taxes, car and fuel taxes and the BBC licence fee, as well as income tax and capital gains tax.
And, by the time we get to the ninth decile, the tax figure gets to around 35%. And it goes up to about 38% in the top decile. On the basis of this range, from 30% to 38%, it is claimed that we have a progressive tax system in the UK.
Tax on wealth
But some people, most of them in the top decile, also have wealth which increases in value each year. That increase is also logically a form of income, and the blue line in the chart above represents the rate of tax paid overall on the combined income and increase in wealth.
Because the average taxes on earned income are around 33%, but on wealth they are 4%, the combined tax rate falls dramatically as your income rises. And as a result, when we get up to the top decile whose main income is from wealth, not earnings, the effective rate of overall tax is around 22%.
And that’s what matters. People aren’t going to leave the country because their overall rate of tax is 22%. Because finding an equivalent rate around the world is going to be immensely difficult for anyone with wealth.
Are there really more attractive offers?
They could do it. They could go to a tax haven and suffer all the miseries of living in such places. I’m always immensely amused when I arrive in Jersey Airport and note that outside that airport you can buy expensive cars. You can buy an Aston Martin to drive round an island where the top speed limit is 40 mph. What people are ever going to do with these cars on that tiny island, I don’t know. The paradox of wealth is there and apparent. They might be incredibly wealthy, but they can’t live in these places. The advantage of the UK is you can live here, and you can enjoy your wealth.
So, most of this group are not going to leave. Their in-laws are here, their children are here at school, their ponies are here, their clubs are here, they would miss their golfing mates. Whatever it might be, they won’t be going. They will be lucky to find a better tax regime.
Reeves should ignore the cries of woe
But also, even if some of them do leave, we’ll still get more tax revenue.
Suppose that 10% of the wealthy go. Then we won’t get tax on 10% of the capital gains that we did previously. So, if Reeves doubles the capital gains tax rate, the revenue won’t rise from £15bn to £30bn because some of those high-net-worth people have left, meaning she will lose £3bn of it. So, the tax take will ‘only’ increase from £15bn to £27bn.
So, if I was Rachel Reeves, I would double the rate of capital gains tax to bring it into line with income tax and deliver tax justice as a result.
In other words, Rachel Reeves can afford to ignore all the protestations of the wealthy right now, because they’re frankly talking a load of nonsense. They have the most phenomenal deal in the UK at present, and even if all my proposed tax reforms were put into place, they would still be vastly better off compared to most people who simply have to work for a living. They’re getting a free ride. They know that. They’re not going anywhere.
