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Number Crunching With Polly

Tuesday, 8th July 2008

Today's great idea from the political journalist of the year, Polly Toynbee:

Sharing the suffering will be essential, daring to tax the top 1% of earners and use those funds to lift the lowest-paid out of tax to compensate for the steep price rises. Close every loophole and refuse to accept as a law of nature that the very rich escape tax. Fairness matters more in hard times.

We don't in fact take it as a law of nature that the very rich escape tax: we rather note that if we try to tax them too much then they'll bugger off and we'll get nothing. The Laffer Curve is indeed true at certain points along the range of possible tax rates.

But still, let's try to do some number crunching here. My assumptions are pretty rough and ready and I'll no doubt be putting things into Polly's mouth that she wouldn't explicitly endorse once the implications are laid out, but they are things she's suggested before such implications are laid out.

So, at what level of income should you start to pay income tax and NI? I think a very reasonable starting point would be the minimum income needed not to be poor, as announced by the Joseph Rowntree Foundation last week (as endorsed by Polly). £13,400 a year for a single person. Someone on that income pays some £2,500 a year in income tax and NI. So we should raise the personal allowance to that level, no?
We of course need to raise it for everyone: if we start means testing it then we'll simply increase the already insane (70-90%) marginal tax levels that people at the confluence of the tax and benefit system already pay. There are 29 million taxpayers so we've got to find £72 billion or so from those top 1% if we are to balance our books (remember, in Pollyworld, there merest suggestion that we might cut government spending is an anathema).

So, how much do that top 1% actually make a year? Well, there's around half a million of them and the average income of that group is £155,000. Or, for the group as a whole, some £77 billion a year. So, at first glance we need to raise the tax rate on the top 1% to 93%: and that's 93% of their total income don't forget, not a marginal rate of 93%. Might just see some people going offski at that rate, don't you think?

However, it gets worse than that. For we've forgotten so far that that 1% already pay tax. In fact, they pay around 35% of their gross incomes at present, or £27 billion. So, in order to balance our books we actually need to get £99 billion in tax from a group that earns £77 billion in total.

No, we really would see a mass buggering off at those sorts of tax rates, wouldn't we?

Now, yes, to be fair, I've made a huge number of assumptions here and yes,more detailed calculations would make Polly's idea seem marginally less barking. However, these numbers are correct roughly and they tell us something very important about the tax system.

The rich simply don't have enough money for them and them alone to pay for the level of government that we have. If we want to stop taxing the poor (which I agree we absolutely do) then we've got to cut spending: the rich just don't have enough money even if we go and steal all of it.