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The top 1 per cent of earners account for 28 per cent of income tax receipts. Should they pay more?

    Warren Buffet recently hit the headlines as he called for the government to tax him more. Since then, fifteen billionaires in France have written to Sarkozy to express similar sentiments, the boss of Ferrari has claimed that it’s only fair he should ‘stump more cash’ and a German group – with the name ‘The Wealthy for a Capital Levy’ - claims Frau Merkel could raise £88.5bn over two years via a 5% wealth tax. In the UK, the debate over the 50p rate has taken a fresh twist. The Chancellor seems clear that it isn’t making the Treasury money, but the Lib Dems look set to push for some sort of wealth or mansion tax to replace it.

    Whilst superficially attractive to politicians suffering in the polls from difficult austerity budgets, this rich-bashing does not provide long-term solutions to the poor public finances and low growth rates in Europe, or indeed the US. Aside from the fact that these super-rich individuals are perfectly at liberty to contribute to their respective Treasuries on a purely voluntary basis, there seems to be a complete lack of acceptance of the long-term damaging effects that these sorts of policies might bring about if rolled out as tax policy. Not only do they ignore the sorts of other contributions that leaving this wealth in the hands of individuals might bring in the form of investment, consumption or philanthropy, but also that these would be a further step in making an increasingly uncompetitive west even more uncompetitive.

    It is argued that these measures would need only be temporary, but our deficit, and that of many other European countries, are structural in nature. The only long-term solution is to substantially raise tax revenues or cuts to public spending. And international evidence suggests that undertaking the latter is the most likely means of achieving growth and prosperity. It would be inevitable for short-term wealth taxes to therefore become medium and eventually long-term policies, as the cuts required become deeper as debt accumulates. Indeed, I suspect that many of the campaigners for these taxes would like to see them implemented indefinitely. But doing so would, as has been consistently suggested, lead to rational business actors and wealthy individuals to simply relocate to more favourable jurisdictions.

    But aside from the arguments about the economic costs and benefits of wealth taxes, it is unclear as to where such a policy would stop. According to HMRC’s own figures, in 2011-12 the richest 1 per cent of earners (roughly equivalent to those in the 50p band) will already be paying 28 per cent of total income tax receipts. Their average rate of tax will be 38%, compared with 10% for those in the basic income band and 21% for those in the higher tax band – meaning that we already have a highly progressive income taxation system. This is before the contributions from other taxes: National Insurance, VAT on spending, Stamp Duty, Inheritance Tax.

    In these difficult times, it is of course right that all possibilities of closing the gap in the public finances are examined. However, plundering the super-rich is not a viable long-term solution to either our, other European nations, or the US deficits. As our Director Tim Knox told the Guardian: “ …in the long term, higher taxes on the rich can hit the less well-off most because less wealth is being generated and put into the economy. So while the generosity and philanthropy of the super-rich should not be questioned, whether their good intentions will produce the desired effect is a completely different matter.” There’s no silver bullet. Tough examination of spending must be made. If billionaires want to donate to the cause along the way then fine, but it is inappropriate for the richest in society to be lobbying their governments for higher taxes, not just on themselves, but on other relatively rich individuals who may well contribute to the economic life of their country in many forms other than providing the funds for state spending.

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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