Are you rich and is everything your fault?

Are you rich and is everything your fault?

28 Apr 2017


It may be stretching a point to say that any of the political parties in the forthcoming “snap” election will make interesting financial arguments but it does seem that the days of competitive spending pledges might be behind us. That would be a relief and at least we could say that the continuing nine year fallout from the financial crash was not for nothing.

I will generalise by saying that opposition parties have a strategic problem. They would like to criticise the Conservatives for allowing government debt to rise from 76% to 90% of GDP during a number of years labelled as a period of “austerity” but they are also against austerity in principle and disinclined to criticise the Tories for pursuing it with insufficient discipline.  

 Yet it seems that calling for even more government borrowing is not regarded as an option for a party with serious ambitions to be elected. So the debate, if that is not too dignified a word, is turning towards where the burden of taxation should lie and whether the status quo is “unfair” (a word that we all remember well from the school playground).


We can all agree that tax evasion, which is illegal, is a bad thing. Unfortunately tax avoidance, which is not illegal, is frequently lumped together with evasion and cited as part of the evidence that some wealthy people or companies are not doing their share.

It is certainly the case that some tax avoidance is morally dubious and some tax advisers come close to crossing legal lines. But much tax avoidance is the result of behaviour that has been encouraged by the government of the day. I avoided income tax by paying money into my pension. I was deliberately incentivised to do this. Children are encouraged to avoid tax by putting their savings into a Junior ISA.

The fact is that you are unlikely to meet anyone who wants to pay more tax but it would be equally unusual to find a person who doesn’t think that someone else should.

Just as the Labour party cannot afford to be a blunt advocate of public spending because it knows that government debt is critically high, the Conservatives are no longer perpetually calling for lower taxes because they know that services to which we all think we are entitled are going to become yet more expensive.

So the result is that the debate at this election has the potential to become a little more subtle than usual.

(I exclude the Brexit buffoonery from this analysis. If you are addicted to hopeless causes just shut up and vote for the Liberal Democrats).


This week Labour launched its routine call for more money to “save our NHS” (which as we know is staffed by morally superior people but treated with disdain by patients  – so unfair!). But this pitch came with a rather limp and unquantified suggestion that it should be funded by increasing corporate taxes. So that was something.

It is not surprising that most people do not realise that pre-tax corporate profits are to a great extent the result of financial and accounting decisions taken by the company itself. Corporate tax avoidance is a big and international industry. Cutting corporate tax rates to incentivise businesses to remain registered in the UK may be morally questionable but assuming that significant sums can be raised by raising the tax rate is simplistic.

The UK government’s recent corporate tax receipts arguably support the classic right-leaning beliefs that receipts are decided by the state of the economy and, more controversially, that companies pay more when rates are lower. Since 2010 the rate has been cut from 28% to 19% but the total raised has grown from £43 billion to £50 billion. As a percentage of total government revenues it has slipped from 9.5% to 8.8%.

Perhaps the idea that you can raise more corporate tax by raising corporate tax rates is plausible or maybe it is false. If proceeds somehow managed to climb back to 9.5% of GDP an extra £3.5 billion would be raised. Either way, you can be sure that any anticipated extra will be spent many times over in the various party manifestos as they are published in the next week or two.


As for personal taxation, there is inevitably a feeling that “rich” people should contribute more. In good times this feeling wanes because more of us aspire to be rich ourselves. In more challenging economic times resentment reasserts itself as a free hit.

I am surprised and disappointed that those responsible for the financial crash have not suffered more. A couple of bullies have lost their knighthoods but almost no one has been imprisoned or financially badly hurt. Taxpayers and shareholders have soaked up the pain. The public has been partly compensated through claims for miss-sold PPI, said to be likely to amount to £40 billion.

The losers from PPI payments are not the bank executives who ripped people off in the first place but the public themselves who are directly or indirectly bank shareholders. To some extent there has probably been a net transfer of money from better off people (share and pension investors) to slightly worse off people (people who borrowed mortgages in the early years of this century).  

The Labour party has kicked off the election campaign by saying that the rich should contribute more in tax. When pressed on the question of who is rich, the shadow chancellor John McDonnell said that it was anyone who earns over £70,000 a year. If you earn £71,000 and have a student loan, your net earnings are £44,460 a year or £3,705 a month.   

I’m not sure I agree that this constitutes richness, particularly if that salary is supporting more than one person. But at least the Labour party has the courage to open up the subject.

Trying to work out whether someone is “rich” on the basis of a single year’s earnings is of course nonsense, unless you are talking about the “wages” of a Premiership footballer. Someone who earns £10 million in a single year should be very comfortable if not rich for the rest of their life (especially if they read this website). The statement that a salary of a little less than three times the national average makes someone rich is based on the assumption that the salary is an annuity that will repeat and probably accrue every year. As we all know that life isn’t like that we might wonder why McDonnell is such a limited or cautious thinker.


Wealth is about owning assets. If you own enough your income should look after itself (unless your assets are something with no yield and negligible intrinsic value like gold). If you own vast assets but have borrowed heavily in order to buy them your net wealth might be negative. Ultimately wealth is about net assets (the value of all your assets minus the value of all your liabilities).

Many politicians would love to tax assets but taxing net assets is devilishly complicated. It would involve the whole population submitting a personal annual balance sheet. It would also feel like persecution to those sitting on (or more likely living in) valuable but illiquid assets who also have modest incomes. Let us be generous and say that the Labour party’s strategists have worked out that this would be political suicide.

The fact is that identifying the rich is very difficult and subjecting them to punitive taxes is even harder. As Billie Holiday once sang:

Them that’s got shall get

Them that’s not shall lose

So the Bible said and it still is news


Billie Holiday – God bless the child.

General economic prosperity helps everybody but it tends to help the wealthy the most.


As I wrote recently, the reaction to the recent budget showed that people are currently extremely resistant to the idea that they are the ones who should contribute more. (Practically all the tax raising proposals in that budget seem to have been dropped). Everyone seems to think that, if they are net contributors to the state, they are doing their bit. And here are some stats to show why.

According to the Office for National Statistics (ONS), UK income inequality is the lowest at any time since the mid-1980s.

Since the financial crisis of 2007/8, household income for the highest earning 20% (sloppily called the “richest” by the ONS) has declined by 3.4% in real terms. Over the same period the income of the lowest earning 20% has risen by 13.2%. Some material redistribution of average income has taken place.

And let me repeat again that the net contributors to the state are now in a minority.

The proportion of households receiving more in cash and benefits (including a monetised value for health and education) than they contribute to the state’s finances is 50.5%. The percentage receiving more in cash than it pays in taxes (including VAT) is 37%. In 1980 these numbers were 42% and 30% respectively.

Perhaps it is no surprise that relatively high earners are sick of being called out to dip their hands deeper into their pockets. 

By now you should have a pretty good idea of whether you are really rich and whether everything is your fault. In all probability the answer to both questions is no. 

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