Tax the Rich or Fair Tax for All

27th April 2023

Written by

By Michael Edenborough

All too often the cry from the Left is that the rich should pay more tax – those with the broadest shoulders should bear the greatest burden. Yet, the top 1% by income already pays 29% of the income tax receipts while the bottom 50% pay just under 10% of receipts, and about 40% of adults pay no income tax at all (HMRC and Institute of Fiscal Studies). Clearly, the richest already shoulder the greatest burden, and taxing them more is likely to be counterproductive.

What is inherent in the cry “Tax the Rich” is that people should contribute fairly to society, and that those who earn more should contribute more than those who, for whatever reason, cannot contribute as much. There is both a moral and societal responsibility at play.

However, in the current system, two classes of people contribute either nothing or significantly less than their fair share, and as such undermine the integrity of the tax system to the detriment of society as a whole.

The first class is those who do not pay what they properly owe by way of income tax or other taxes, because they do not declare their earnings or profits. These are all tax evaders. Unfortunately, there are many such people in the community: for example, the businesses that operate on a cash-only basis (or sometimes offer a different price depending upon whether the customer wishes to have a receipt for the goods supplied or services provided); or, the criminal entities who operate in the shadows.

The second class comprises those businesses that take advantage of favourable methods of ensuring that expenses are accrued where they can be off-set against taxable profit and the profit is realised in a jurisdiction where the tax rate is low. Many of these businesses are household names that funnel profits created by trading activities in the UK to holding companies in other jurisdictions. The consequence is that the UK receives far less tax that it otherwise would. While not tax evasion (as this is currently legal), it is reprehensible tax avoidance.

Both these activities are parasitic in nature and undermine the integrity of the tax system. The first, because by evading properly due tax, a greater burden falls on those who abide by the rules. If all the tax that was due were paid, then the burden on all would fall. The second, because the profits that are being made in the UK are predicated in part upon the infrastructure that is paid for centrally by those who pay tax. An internet business cannot deliver its goods unless there is a functioning transport network in place. Yet, by off-shoring its profits, it pays less than its due to provide and maintain that network.

Both these problems can be solved relatively easy, but political commitment is needed.

To tackle the first, more tax inspectors need to be hired and trained to detect, prosecute and recover evaded tax. Given that at present, far more is recovered than is spent in its recovery, the only reason for not recovering more evaded tax is a lack of political will. As this amounts to, in essence, free money that the government could gather, it is negligent not to try harder.

To tackle the second, a change of attitude to powerful international corporations is required. The argument that these companies will move abroad, and so deprive the UK of everything if they are taxed anymore on their UK activities is flawed. The UK is a large and rich market. No international business would wish to be excluded from the opportunity to make money here. It is not unreasonable that the profit generated within the jurisdiction is taxed within the jurisdiction, rather than the domestic profit being artificially reduced by the invocation of expenses and the like that do not properly arise from the domestic activities. While many of these schemes are Byzantine in their complexity, some are remarkable simple. For example, a UK trade mark may be held by a holding company in an off-shore jurisdiction, which then licenses its use by the UK trading company. That licence fee may be used to reduce the profits that accrue, and so are taxed, domestically, while the fee is taxed in the tax-friendly jurisdiction of the holding company. Again, if all businesses that make a profit in the UK were to contribute their fair share, then the tax burden for all would be reduced.

If these anomalies were resolved, then the tax burden for each class would be reduced, which would decrease the motivation for evasion or avoidance. Further, with a lower tax burden, there is an increased motivation to earn more as more of the fruits can then be enjoyed. A clear win-win would result from such a fairer system for all.