The focus of this post is on income tax, the moral objection to it, and a possible replacement to it. It starts with a brief overview of how income and income tax are both distributed in the UK. This is summarised in the graph.
The figures used for the graph have been derived from an HMRC study to estimate the disincentive effects of the current top income tax rate of 50%. http://www.hmrc.gov.uk/budget2012/excheq-income-tax-2042.pdf (Thanks to Frances Coppola for the link).
Although the assembled figures may not be precise they are not misleading. The graph gives an accurate impression of how income and income taxes are shared across the different income groups.
Key points shown by the graph
- One per cent of individuals receive income in excess of £150 k per year. This group receives 14% of all incomes and pays 29% of all income tax. This group pays the 50% top rate income tax.
- At the other end of the income scale 47% of individuals receive incomes of less than £10 k per year. This group receives 16% of all income and pays 9% of all income tax. Many individuals in this group will not pay income tax and those that do will not pay more than 18% of their income.
- The graph confirms UK income tax to be broadly progressive. That is, the proportion of income surrendered through income tax increases as income rises.
- The ratio of the top income percentile to the bottom income percentile is roughly 40. This means that on average someone in the top income group receive £40 for every £1 received by someone in the lowest income group. This is a rough estimate only and is not cited as a precise figure – it is merely intended as an indicative measure of income inequality in the UK.
- A similar calculation for income tax paid yields £150 for the top percentile against every £1 paid by the bottom percentile. Again, this is a rough estimate and is intended to be no more than indicative.
Objection to income tax
Libertarian thought , at least as formulated by Nozick, http://www.iep.utm.edu/nozick/#SH2a (hat tip to Chris Dillow for the link) seeks to persuade us that income tax is akin to theft or forced labour. Although Nozick’s thesis is persuasive to many, it is also incomplete because it offers no solution to poverty or extreme inequality. His thesis holds that there is just one virtue, that of self-ownership (self-determination). Many people will hold that other values, such as charity and compassion, are of equal importance and that Nozick seeks no balance between these sometimes competing values.
Abolition of income tax
It is probably uncontroversial to say that abolition of income tax without replacement would severely damage living standards for lower income households. Public services depend on taxation and so income tax abolition would damage the welfare state upon which vulnerable people depend unless a suitable replacement was found.
Abolishing income tax might well cause high income groups to hoard the additional money arising from the tax savings. High income groups spend a smaller proportion of their incomes on goods and services than lower income groups do.This is significant because spending on goods and services keeps money in circulation and people in employment. Hoarding money, in contrast, takes money out of circulation and subtracts from the commonwealth. Hoarded money is either sent abroad or comes back into circulation through someone being granted a bank loan. Hoarding thus obliges people to incur debt instead of earning their way to pay for their monthly outgoings.
High income tax rates go some way to addressing the propensity of high income groups to hoard because the government spends taxes on public services that employ people and on benefits. A high rate of income tax levied on high incomes, which is then injected into the economy through government spending programmes, keeps money in circulation which otherwise would have been hoarded. Low income groups, who often benefit the most from public spending, are less likely to go into debt if the tax and benefit systems assist then to finance their monthly outgoings.
Replacing income tax
A replacement tax, which might overcome Nocick’s objection to income tax, may be a Land Valuation Tax (LVT). Introducing a LVT to replace income tax may also eliminate the alleged disincentive effects that high income tax rates may have on investors and job creating entrepreneurs. A Land Valuation Tax will need to address the issue of hoarding and be able to raise enough to replace income tax if it is to be an effective and fair replacement to income tax.