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Monday, 17 January 2011

(Tax) Dodgy stats from the Sunday Times

There are lies, damn lies and statistics, but you would expect the Sunday Times to know the difference. Instead they have used some statistics to try and prove a point that are the very definition of ambiguous, and it is a shame as they could and should have done better.

It was the leader article this Sunday (Jan 16th) and used the example of the tax avoidance schemes footballers are using to make the point that high tax rates breed clever tax avoidance, thus lower tax revenue. So far so good, but then they attempted to claim that lowering the higher rate of tax from 83% to 40% (as the Tories did in  the 1980s "boosted, rather than reduced, the share of income tax paid by high earners."

This, in my view, was an attempt to say that a lower high rate of tax is progressive, which means that those on a higher income pay a higher percentage of that income in tax than do those on low income. They followed this up with some statistics.

 "In the last year before the new 50% tax rate came into force, the top 1% of earners contributed 25% of all income tax revenues. That compared with 21% a decade earlier and just 11% in 1978-9, the last year of Mr Healey’s tax regime. With a high tax rate of 40%, the top 5% of earners contributed an impressive 44% of all income tax revenues."

Now, on the face of it, the Sunday Times make their point. The top earners are paying more tax. Progressive right? Job done? Case closed? No, a great example of statistics used to prove a point which with very little effort can be seen to actually show something quite different.

Imagine there were 10 people living one an island with a GDP of £100,000. 9 of those people earn £5,000 a year, and one earns £55,000 a year. If everyone paid the same tax rate (say, 10%) then you could say that the "top 10% of earners paid 55% of all income tax revenues" and conclude that all is fair and progressive on that island. You could even make the person on £55,000 pay double the tax rate (20%) and then say "the top 10% of earners paid 71% of all income tax revenues" and all looks even more like a progressive paradise.

But that of course would ignore the issue that one person earns 11 times what everyone else earns. In this country we have bankers and footballers earning more in a DAY than the average YEARLY salary of the country. They are in that top 1% of all earners who are contributing 25% of income tax revenues, but that's more because of rampant income inequality than progressive tax rates.

In 1979, when the high tax rate was 83%, the Gini coefficient of the UK was 0.25, now it is in the mid-0.40s. The Gini Coefficient measures income inequality. The nearer it is to 0 the more equal income is, the nearer it is to 1 the more unequal our income distribution.

We have plenty of other examples of the creation of a financial elite in this country. How about the way that the average pay of CEOs has sped so quickly away from the average pay of a "shop-floor" worker. The UK ratio is second highest in the world after the UK and has multiplied again and again over the past few years.

Those CEOs pay more tax, much more tax compared to their cleaners. But that doesn't mean they are paying a higher rate of tax (even with the highest rate of tax at 50% there are so many tax avoidance schemes it is quite possible that CEOs pay less tax as a proportion of their income than a cleaner). It also hides the income inequality in this country.

I actually have no argument with the point the Sunday Times was making. There is an "ideal" higher tax rate for raising the highest tax revenue and it probably is lower than 50% (although David Cameron is rightly going to wait for the tax revenue figures to be released before judging that ).

But if you are going to argue that a 40% tax rate is "fairer" or more "progressive" than a 50% tax rate you need to find better statistics than the ones they found.

I'm not angry...just disappointed.

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