Andrew Willshire

Why someone on £80k might not feel rich

Why someone on £80k might not feel rich
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As in every election in recent memory, a debate has broken out over the point at which a person becomes ‘rich’ and is, therefore, able to cough up a bit more to fund public services. The magic number this time is £80k – the salary around which a person enters the top five per cent of all income tax payers and who, according to Labour, will be required to pay ‘a little bit extra’ to fund their massive splurge on public spending. There are roughly 1.5 million people in Britain who fall into the top five per cent, who already contribute 50.1 per cent of all income tax collected. When Andrew Neil pointed this out to Jeremy Corbyn  last night, he replied: ‘We think they could and should… pay a little bit more.’

Now, £80k is obviously a lot more than the average salary of £23k.  But one of the stranger things about this debate is that it is only ever gross incomes that are considered. The redistributive effect of the current tax and welfare schemes is ignored. Factor that in, and things look very different.

As in the 2017 version of this analysis, consider two similar families; both have two teenage children and both rent a three-bedroom house in Hackney, North London. In each case, one of the adults works while their partner stays at home. The only difference is that one family has a gross income of £14k (close to minimum wage) while the wage earner in the other family earns £80k. The lower-earning family qualify for tax credits, housing benefit and child benefit; the higher-earning family qualify for no benefits whatsoever.

In this case, the family on minimum wage and in receipt of benefits has approximately two-thirds of the net income of the family with a single earner on £80k.

So, despite earning almost six times more, the family with the high earner has a net income that is only about 50 per cent greater than the other family. Make no mistake, that’s still a significant difference, but neither does it seem that we’re troubling the ranks of the super-rich.

It’s worth noting that a significant portion of the total subsidy is through the form of housing benefit. This is obviously less in other parts of the country and is also not received by owner-occupiers, which may highlight another disincentive for people being able to purchase their own property – it could leave them substantially worse off. However, even excluding the housing benefit component, tax credits can increase a family’s net income by up to 73 per cent.

To see the level of the redistribution that occurs more clearly, consider the net flow of money to or from the government at various salary levels for our example.

It is only when a family in this position is earning more than £45k that they start to pay more in tax than they receive in welfare, more than twice the median income. Below this point, no contribution is being made to public services either. The family with the single £80k earner will be paying income tax and national insurance of approximately £25k, which is just a bit more than what the low-income family receives in benefits.

This is only one simple scenario, but it’s illustrative. Singling out people who pay over £25k a year in tax and demanding that they pay still more could be regarded as inequitable. The top five per cent already pay half of all income tax receipts while the bottom 50 per cent of taxpayers pay less than ten per cent.

It’s also worth remembering that people find themselves in different situations throughout their lives. Peak earning potential is normally reached in a person’s late 40s to early 50s, so the top five per cent of earners is not a static group of people – many people will enter and exit that band at some point in their lifetime, and even more will aspire to reach those heights. This is why it might be a mistake for Labour to speak of them as a group apart.

It’s perhaps reasonable to say that people earning more than £80k a year could afford to pay a bit more. No one would end up on the breadline if they did. The question of whether they should pay more is harder. We’ll find out what the majority thinks on 12 December.