Taxation: perception and reality

The public debate about tax and its importance in funding public services is often confused. Today’s report from the Equality Trust (authors of the Spirit Level) seeks to determine people’s understanding of tax, but also discover what people believe people should be taxed, and how this compares to the UK’s current tax system.

Public polling conducted in partnership with Ipsos MORI reveals that:

• Public perception of how the UK’s tax system affects households in different income groups contrasts sharply with the reality
• The public believe the UK’s tax system is more progressive than it is, with nearly seven in ten people (68%) believing that households in the highest 10% income group pay more of their income in tax than those in the lowest 10%. In reality, the top 10% pay a smaller proportion of their income in tax than the bottom 10%
• Public support for a more progressive1 tax system is high. Over eight in ten (82%) believe that households in the highest 10% income group should pay a greater proportion of their income in tax than those in the bottom 10%. An even greater majority (96%) would like the tax system to be more progressive than it currently is.

 

In reality the actual proportion of gross household income that households at each decile pay in all taxes shows that:

• The current tax distribution in the UK is regressive.
• A household in the bottom 10% pays 43% of its income in tax, while the average household and a household in the top 10% both pay 35% – 8 percentage points less than the bottom 10%.
• The higher percentage paid by the poor (bottom 10%) is attributable to a number of taxes. While income tax and national insurance are broadly progressive, the bottom 10% of households pay roughly 23% of their gross household income in indirect taxes on consumption and more than four times as much of their income in council tax as the top 10%.

The authors therefore argue that these findings show that the current tax system is not fit for purpose. And they make the following recommendations:

• Parties seeking to form the government from 2015 should commit to the principle that any changes in tax policy are progressive
• Council tax should be transformed into a progressive property tax by re-evaluating properties and creating new bands with higher rates for high value properties
• Government should look to reduce VAT when it has a budget surplus
• The upper limit of National Insurance should be raised to ensure that the tax is progressive across all deciles.

 

Hard to disagree with most of that!

 

 

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