The case for austerity among the rich
Do the very rich account for a larger proportion of total tax revenues now than they did 30 years ago because the top rate of tax is lower than in the early 1980s?
Supporters of the so-called Laffer Curve, based on the notion that high earners will work less as tax rates go up, argue that this is indeed the case. A lower rate of tax has induced more effort, more income and so more tax revenues.
Or is it more simply that the very rich now take home such huge salaries and bonuses for doing no more than they did 30 years ago that explains the increase in the tax they pay?
This is the conclusion reached by Professor Danny Dorling of the University of Sheffield in a paper published today by IPPR: The Case for Austerity among the Rich.
Over the last 30 years, pre-tax income inequality in the UK has increased, as it has in most advanced countries, to reach levels last seen in the 1920s. And it has been massive rises in the incomes of those right at the very top of the income scale that have caused this increase in inequality.
In 1997, the average income of someone in the top 0.1% of earners in the UK was almost £650,000, or 61 times the average for those in the bottom 90% of the income distribution. By 2007, this had risen to almost £1,200,000 (a gain of 82%) and was now 95 times the average of the bottom 90%.
This happened because the CEOs of the UK’s largest companies and the small group of people that make up their boards and remuneration committees colluded to push up pay of top executives and the rents that were being extracted from the rest of the economy by the financial sector soared.
In his paper, Dorling argues that it is a myth that reducing the taxes on the very rich has somehow made the bulk of the population better off and suggests that a little more austerity among the rich would be an appropriate response to the current economic and fiscal crisis.
True, sales of luxury cars, the receipts of boarding schools and the profits of Michelin-starred restaurants would be lower as a result, as would house prices in the fashionable parts of London. But the impact on the bulk of the population would be negligible.
More austerity among the rich would, Dorling suggests, make it possible to lessen the scale of public spending cuts. He points out that by 2015, according to IMF forecasts, the UK will have a lower ratio of public spending to GDP than the United States and 14 other western EU countries.
And the danger of not acting is to entrench income and wealth gaps in the UK that are greater than at any point in living memory and greater than in almost all similarly wealthy countries. This could be expected to lead to high and rising levels of crime, social disorder, dysfunction and rising polarisation, fear and anxiety. Not a country happy with itself or pleasant to live in – except for the very rich isolated in their enclaves.
It is in this context that the Chancellor’s decision to cut the top rate of income tax from 50p to 45p should be seen – though it is not in fact the main issue. The bigger concern should be the huge disparity that has grown up in pre-tax incomes. The case for austerity among the rich is not about a return to the punitive tax rates of the 1970s; it is about reversing the 30-year trends to greater inequality in wages and salaries.
Tony Dolphin is Chief Economist at IPPR
Professor Danny Dorling’s paper is published today by IPPR: The Case for Austerity among the Rich
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