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Impact of tax policy on rich and poor

06 June 2014


From Mr Richard Murray

Sir, - The proverb "Fools rush in where angels fear to tread" came to mind when I read Canon Tilby's column (Comment, 23 May). Having worked in the belly of the beast, I can assure her that tax policy is more complex than she imagines.

The tax gap, which is defined as the difference between the amount of tax actually collected and the tax that Parliament intends should be collected, is eye-watering, whether one accepts the official figures of HMRC or those estimated by tax-justice experts, according to their different calculations. At the very least, the amount lost to the Exchequer by tax avoidance would substantially ameliorate the current austerity measures, and go some way to closing the inequality gap that exists in our society.

Canon Tilby speaks of "punitive" tax rates. It is widely presumed that those subject to the higher tax rate pay this on all their income in tax to HMRC. That is not true. They pay the higher tax rate only on their earnings in excess of the specified amount, and those earnings are reduced in any event by the allowances and reliefs that they can claim for tax purposes. It is more accurate to speak of higher marginal rates of tax.

Are there not good social reasons to apply high marginal rates of tax to the income of the wealthy? In the UK, tax rates as a proportion of income are highest on the very poorest, even after taking benefits into account, because the burden of indirect taxes, often left out of the argument, falls most heavily on them. And why should higher marginal tax rates not be used to have an influence on the behaviour of some corporate executives, for example, when they realise that they would be unable to keep the excessive rewards that they give themselves? Why should maximising income be the primary aim for the very rich, but not for anyone else?

"Tax planning", which in the main is concerned with reducing tax liabilities legislated for by Parliament, is one thing. Most people save to some extent, and ISAs are used to encourage such saving - in effect, they are a way of reducing taxation at low- and middle-income levels, for the vast majority of the population. Encouraging investment in enterprise, a productive form of public investment, which is mainly an opportunity for the wealthy, requires some extra encouragement because it involves risk. But using the system to exploit these incentives, to avoid paying tax that is rightly due, is quite another matter. In a strict sense, such avoidance may be legal, but it is hardly moral.

Implicit in Canon Tilby's argument is the assumption that hitting the rich with "punitive" taxes is unproductive; so the rich should not suffer even higher marginal rates of tax, because "preventing wealth does not cure poverty." But research has shown that the argument that the rich save more than the rest of the population, in order to reinvest productively, is a myth.

A growing economy requires educated workers, a well-developed modern infrastructure, and a healthcare system when workers fall ill; so an efficient tax system is essential for the public finances. Higher taxes on the rich do not damage the poor; falling GDP does; and the economist Thomas Piketty has shown that cutting taxes for the rich doesn't benefit anyone except the rich.

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Kemnay, Inverurie AB51 5RN

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