Success != Being Rich, But it helps

Earlier today, Martin Pilkington posted a blog entry criticising the criticism of the new 50% tax rate and equating “high pay” (which Martin seems to think starts at £100K or so) with greed.

I should say, in the interest of disclosure, that I do not pay myself over £150,000 (or even over £100,000), so I don’t have the inherent bias that would derive from being the victim of this new measure.

However, being a natural conservative, I do have a few things to say about Pilky’s argument.

Greed?

Taxing people 50% on their earnings over £150,000 isn't taxing the successful. It isn't really taxing the rich either. It is taxing the greedy.

The first thing I take issue with is that anyone earning (or paying themselves, which is really what most of Pilky’s blog talks about) over £150K is necessarily greedy. Maybe they really have earned it. Perhaps their business doesn’t need more staff, and makes more than enough money to afford to pay this much. In that case, it seems to me that it’s entirely their business whether or not they pay that much, and it’s entirely their business what they choose to do with it if they do.

The problem is with those who earn a lot of money each year, more than £150,000, and then spend it on themselves.

This is a fatuous argument; in order for it to work, the money that is spent must only benefit the individual spending it, which clearly isn’t how capitalism works. When you spend money on something, that money goes to somebody else (probably a retailer, who takes a cut, then a distributor, who takes a cut, then a manufacturer, who takes a cut, each cut being used to pay staff and also generating tax revenue for Government).

There is a similarly fatuous argument that “the problem” is with those who earn a lot of money each year and then don’t spend it. In which case, the money is probably in a bank being used to finance businesses, mortgages, car loans and the like. Again, it’s being put to good use, even if the person who earned it has decided to become part of what used to be called “the idle rich”.

The only real problem is with someone who earns lots of money, then somehow sits on it, without investing it, without depositing it at a bank, and without spending it. But who exactly would do that? Only a madman.

If you are running a successful business and taking £150,000 a year in wages or more then you're being greedy.

Again, this is pure jealousy. I reckon it would be easy to burn through a £150K salary in the South East and end up with a fairly modest lifestyle (particularly in London, and particularly if you had a family to support and wanted to buy a house).

Telling people how to spend their money?

But what about the other £100,000? Well that could be given to charity. Think about how much good you could do with £100,000. Or how about hiring some more staff. You could hire three people for £33,000 a year.

Doesn’t this suppose that you think the charities are worthy of your money? And that they won’t (for instance) squander it or use it to pay their Chief Executive’s salary? And who’s to say that they’re more worthy of your money than the artist that made the painting you bought? Or the carpenter that made your table?

And why should businesses create unnecessary jobs? If they don’t need additional people, they shouldn’t be made to employ them no matter what the unemployment figures look like.

The taxes being taken from a business's profits aren't really a loss of money, but an investment in the business.

It depends what the money is spent on, and all too often the Government demonstrates that it is not only bad at spending your money, it is uniquely bad at spending it (I should probably attribute that phrase, but I forget where it comes from). Partly because the people doing the spending simply don’t care; it isn’t their money — they didn’t slave away for hours to make it, and so they don’t appreciate its value.

We hear every day about inane non-jobs (“street football co-ordinator”s and the like), and about daft regulations that mean that people are now expected to have a certificate to use a step ladder. These stupidities cost money. No business in its right mind would ever waste money doing those kinds of crazy things, but Government isn’t spending its own money; it’s spending your money, and my money. And it can even spend it before we’ve even earned it — indeed, here in the U.K., some of us actually have to pay tax on money we haven’t yet earned.

Avoidance

The silliest thing about the new tax rate is that as you increase the upper rates (particularly the upper rates) of taxation, you increase the benefit in paying expensive accountants, off-shore banks and so on to help their clients minimise their tax bills.

You also increase the motivation of businesses to offer salary sacrifice schemes and all kinds of non-cash perks for which they can minimise the taxable impact on their employees.

This is especially true when you do something as blatantly unfair as removing the personal allowance when someone’s income trips over a particular threshold, which can result in an extremely high marginal rate of taxation for people near the boundary.

I shall make a prediction here: if the 50% rate and the removal of the personal allowance goes ahead, the Government will bring in nowhere near as much extra tax from it as it is claiming now.

Fairness

One of the big problems I have with the current taxation system here in the U.K. is that it is just plain unfair.

The general public has been hoodwinked into thinking that it is only because of the “Progressive” taxation system that the rich pay more tax, and that it is right that the tax rate should increase because “after all they
can afford to pay more”. Even the word “progressive” is now used mischievously by the political classes; they use it to mean a Marxist taxation arrangement where the rate progressively increases with income, whereas the general public uses it more in a sense of “modern”, “fair” and “decent”.

Yet if you sat most people down and gave them an apple each, they would agree that a fair “tax” system might be for “Government” to take the same sized bite of each apple. And now if you allowed people to give their apples to other people in exchange for (say) making them laugh, they would probably still agree that a fair system would be for “Government” to take the same sized bite from every apple, such that someone with two apples would lose two equal sized bites while someone with a single apple would only lose one.

Now, you might say, we can’t have a flat rate tax system; it isn’t fair because it means that the poorest in society have money taken from them when they can’t really afford it — everybody has basic needs and we need to deal with those first. And you’d be right.

So a proper, fair, taxation system would have a (large) personal allowance, to which everybody is entitled free of tax, followed by a flat rate thereafter. The personal allowance would be tailored such that it was roughly equal to the basic cost of living, so that the poor are effectively removed from taxation altogether. (Of course, this would still technically be a progressive taxation system, albeit a much less complicated one.)

I think by adopting a system like this, and (ideally) scrapping all other taxes, allowances and so on, the tax system would be easier to understand, easier to police, more visibly fair and less likely to be subject to widespread avoidance. And the rich would still contribute more of their income than the poor; in fact, it would be harder for them to avoid doing so.

Posted by alastair on April 23, 2009 at 7:10 PM | Permalink | Comments (3) | TrackBacks (0)