Squeezing rich ‘harms economy’
Britain’s reliance on taxes of wealthy leaves nation vulnerable to financial shocks, warns OBR
BRITAIN’S economic security is being put at risk by the growing reliance on taxing the wealthiest, the official financial watchdog has warned.
The Office for Budget Responsibility reported yesterday that over the past decade, the proportion of income tax paid by the top 1 per cent has risen from 24.4 per cent to 27.7 per cent. It said that the country’s “reliance” on a small number of people paying so much tax meant that the economy was now more “vulnerable” to financial shocks than it was before the recession a decade ago.
The report also raises concerns that the bulk of revenues from stamp duty are coming from the wealthy after a series of tax rises by David Cameron’s government.
The watchdog says that the economy could face significant damage if wealthy people choose to move to other countries with lower tax rates.
France and Italy are bringing in tax breaks for high earners in an attempt to attract business after Brexit and Donald Trump is planning to cut US corporation tax to as little as 15 per cent.
The OBR also issued a stark warning about the risk of “austerity fatigue” after Jeremy Corbyn and some Cabinet ministers urged the Prime Minister to increase public spending.
It said: “There are risks from the concentration of tax receipts among a small number of taxpayers.
“In the medium term, this makes our receipts forecasts particularly vulnerable to shocks that affect high earners like a potential negative impact of Brexit on the financial sector or crises that hit asset markets. In the long term, increasing reliance on a small number of taxpayers is likely to make receipts more volatile and harder to forecast, especially as high earners are more mobile and have greater scope to plan their tax affairs.”
The report highlighted the fact that while millions of people have been lifted out of the tax system under the Conservatives, higher earners have been hit by a series of rises.
It said that while the overall number of taxpayers had fallen over the past decade from 32.5 million to 30.3 million, the number of higher-rate taxpayers had increased from 600,000 to 4.5million over the same period.
Low earners have benefited from an increase in personal allowance, the threshold at which people begin paying tax, which has risen from £5,225 in 2007-08 to £11,500 in 2017-18.
Over the same period, higher earners have faced the introduction of the 45p additional rate of income tax for those earning over £150,000 and tapering of the personal allowance for those earning over £100,000.
George Osborne, the former chancellor, also slashed pensions tax relief and dragged hundreds of thousands of people into the higher rate of income tax by freezing the threshold at which
it is paid. The report says: “Increasing reliance on mobile taxpayers means that even small responses could have big effects on receipts.”
Lord Lamont, the former chancellor, said: “The rich are paying a higher proportion of direct taxes than ever before. It’s obviously a process that can’t go on ad infinitum. Tax can’t always go on being paid by other people. In terms of the stability of tax revenues, the broader the tax base the better.
“Sometimes raising tax cannot increase revenue at all and may actually decrease it. On stamp duty, I am particularly concerned that depressing the top end of the property market will ripple through to the rest of the market.”
The OBR report also said minority government could “loosen the Treasury’s grip on public spending control”, amid Cabinet splits over the public sector pay cap as Mrs May faces calls from senior Tories to ease austerity.
It added that unfunded giveaways “would only add to the longer-term challenges”. “In many recent fiscal events, giveaways today have been financed by the promise of takeaways tomorrow,” it said. “The risk there, of course, is that tomorrow never comes.”
The watchdog said it was important to limit borrowing. “The public finances need to be managed prudently during more favourable times to ensure that when these shocks do crystallise they do not put the public finances on to an unsustainable path.”
Meanwhile, figures showed that the number of workers in the public sector has gone up for the first time in seven years. In 2015-16, some 4,461,765 people worked for central and local government, including the NHS, up by 28,000 on the year before.