Some of you have complained about the idea of progressive taxation, some about the use of the word to describe a system which takes more from the rich than from the poor. I used the word because it is the term commonly used to describe tax systems which take more from those with more income and wealth. The alternative is poll taxeor fixed per hominem taxes. Some argue consumption taxes are “regressive”, hitting those on low incomes more. Yet if you look at VAT in the UK, because items like food are exempted, the rich pay proportionately more VAT as well as Income Tax, as all luxuries attract the full rate tax.
Some of you suggest a flat tax. This is still a tax which taxes the rich considerably more than the poor. If person A is on £20,000 a year, and the flat tax is 20% with the first £10,000 of income tax free, they pay just £2000 of tax, or 10%. Someone on £100,000 of income pays £18,000, or nine times the amount of the person on the lower income, at 18%. When Mr Osborne said he liked flat taxes, it still left him supporting the general notion that that the rich should pay a lot more than those on low incomes.
The June 2010 Red Book set out illustrations of how progressive the current UK system is. A family with one child on an income of £10,000 a year receives in 2011-12 £6150 from the state in tax credits after allowing for income tax and National Insurance. Someone on £20,000 a year pays a net £1800, on £50,000 a year pays £14,405, and on £100,000 a year £35,405. The person on £100,000 a year pays almost twenty times what someone on £20,000 a year pays, if they have one child.
Recent budgets have increased the tax on the higher earners, and increased the net payments from the state to lower earners. The top decile of earners have been asked to pay £1600 a year more on average as part of the budget measures to curb the deficit.
In the March 2011 Red Book the Treasury gave their latest numbers on overall contributions to the state or drawings from the state. These were based on 2008-9 figures, so the latest would give more to the low income groups and take more from the high income groups. They showed that the top 10% of income earners contributed around a net £30,000 a year on average, the next 10% around £18,000 a year and the third from top decile around £14,000. The bottom three deciles of income recipients all received money from the state, with the second lowest income group getting most at around £3000 a year. These figures show benefits received minus all direct and indirect taxes.
I would be interested to hear views on whether this is fair? How progressive would you like the system to be? How progressive can it afford to be, without discouraging people from work or from risk taking?