“The UK income tax system taxes those individuals at the very top of the earnings distribution relatively (i.e. relative to lower earners) more heavily than most of the other European countries’ systems studied.” Institute for Fiscal Studies, 2019
Tax the rich is the usual mantra on the Left of the political spectrum. The UK tax system seems to have taken that to heart.
The top 10 percent of earners in the UK pay around 60 percent of the total income tax collected by the state (Chart 1 below). In addition, as our chart of the month shows, the uplift in income tax rate paid by top earners in the UK is higher than that seen in other European countries. National Insurance Contributions also rely disproportionately on higher-income people.
The UK has a more progressive tax system than European countries declaring themselves social democracies.
Of course, income tax is only one of the many seemingly endless taxes that we all pay. Overall, and despite all the gnashing of teeth around today’s tax burden in the UK, the country raises less in tax revenues as a proportion of GDP than comparable European countries.
This is largely due to lower levels of social security contributions (employees and employer and payroll taxes.) The UK tax take is, however, higher than the OECD average, see Chart 2 below.
Resilience
Any system that is dependent on greater concentration in its revenue sources is naturally less resilient. This is also true of taxation where higher earners tend to be more mobile.
There is little doubt that the UK finds itself facing a period of fiscal strain. Tax giveaways in a spring budget will likely be marginal in the greater scheme of things.
If we get an incoming Labour government at the next election, the pressure to look at further opportunities to increase the tax take may become irresistible – despite all the firm pre-election promises to the contrary. The famed ‘efficiency savings’ that everyone has been tapping for decades and continue to be touted as the solution to everything will eventually run out – unless they already have.
Questions remain: Is the usual ‘tax the rich’ approach favoured by the Labour membership viable? How much more concentration of tax revenue can the country reasonably bear? Will any meaningful extra revenue desired have to be made up by tapping a broader tax base – which is essentially what the Chancellor has already done by freezing tax thresholds?
Or will the government just have to do less?
As always, difficult political choices.
