Redistribution Through Tax Reform Jim Mcauslan

Jim Mcauslan Contribution to Health, Wealth and Poverty conference November 1992

No one likes to pay tax. But the majority of people are willing to pay their fair share of tax, if they know that others are also making a fair contribution, and that the revenue collected is being used for the public good.

In February 1991 my union, the Inland Revenue Staff Federation, commissioned MORI to do some polling for us on attitudes towards taxation. People were asked what system of taxation they considered to be fairer.

The overwhelming majority -69% of respondents – favoured income tax because it is progressive and directly linked to the amount of income earned. Furthermore a significant number of respondents – 57% -argued that they would like to see a more graduated system of income tax with 20% as the minimum level, rising to 50% for the highest income tax payers.

The Role of Taxation Policy

Speaking as both an ex-tax official as well as a trade unionist, I would argue that any taxation system is not simply about raising revenue, but must also be about doing this in the most efficient and equitable manner.

One of the key arguments about the equity of taxation focuses on the ‘equality of sacrifice’. When an administration raises taxes, the burden of taking £10 from an individual earning £500 a week is proportionally less than taking the same amount from someone earning £300 a week.

These arguments suggest that ‘fair’ tax systems should be ‘progressive’, so that the proportion of income taken in tax rises with income. A good example of a tax which was exactly the opposite to this – a ‘regressive’ tax – is the Poll Tax whereby the majority of adults, regardless of income, were asked to pay the same cash amount – a system that therefore by definition penalised the lower paid.

It goes without saving that the extent to which a government would want taxes to be progressive will be determined by a number of factors, not least being its political and economic disposition. However, the theoretical model is much simpler.

Income Distribution

The extent to which one wants progressive taxes will be dependent on the amount of pre-tax income inequality which exists. If pre-tax incomes are evenly distributed, the tax system would not have much of a role.

By contrast, where pre-tax incomes are unevenly distributed, the tax system could have a key role to play for those who want to see a fairer distribution of spendable income and living standards.

So what has happened to pre-tax income? Between 1978/79 and 1991/92, average male earnings have risen by around 255% compared with a 164% increase in the Retail Price Index, suggesting a real increase of about 35%. Similarly real GDP rose by 27% during this period.

If you look closely at the New Earnings Survey (1991, Part A, table 15), of the March 1991 edition of Economic Trends, you can see evidence that indicates a growing dispersion of the earnings distribution, with those on above average earnings enjoying a much higher rate of growth than those below.

The interaction of changes to the tax regime and income distribution is central to the more equitable distribution of the country’s resources. It is on this issue that I wish to concentrate.

I have already indicated that all the evidence seems to show that since 1978 the gap between rich and poor in real terms has widened. In a very telling Parliamentary Question (2.5.91,c294), we were told that a person earning over £70,000 per year pays £742 a week less in income tax than when the Tories came to power in 1979. On the other hand a married couple on average earnings have seen their tax burden increase by 13% or four percentage points.

There is nothing that the present conservative government is doing that will address this and in many ways their policies are making these divisions even deeper.

Conservative Tax Policy

Since 1979 there have been a number of major changes in British taxation policy at individual as well as at corporate levels. Those changes affecting individuals primarily include the abolition of the highest rates of income tax along with a reduction in the basic rate from 33% to 25%. This was accompanied by an increase in VAT from 8% and 12.5% to 15% in 1979 and then to 17.5% in 1991. There has over recent years also been an increase in the standard rate of National Insurance contributions (NICs). Changes affecting businesses include reforms of corporation tax in 1983 and the abolition of the upper earnings limit for employers’ NICs.

All this has meant that for the vast majority of people in Britain, taxes under the Tories have increased from 34.5% of national income in 1978/79 to 37% in 1991/1992, rather than decreased. Poverty is increasing, and a fairer tax system is one way that could be used to address this problem.

How Does Taxation Fit into this?

The tax system is an integral element in the debate about a more equitable redistribution of resources within society.

Taxes collected by my members in the Inland Revenue are known as direct taxes, because they are payable directly on incomes and profits. The other main form of taxation is known as indirect taxation, which is essentially a tax on spending.

Direct taxes tend to be more progressive as they are linked to the amount of income an individual earns. Indirect taxes, such as VAT and the Poll Tax, are regressive because they are a flat rate tax that applies to all individuals, regardless of income.

During the last decade or so Conservative taxation policy has been based on the idea that lower direct taxes encourage people to work harder, because more of their effort goes into their own pockets and that this, in turn, will stimulate the economy. This premise is underpinned with a belief that any government should only have a limited role in the economy and that the state has become too big.

Organisations such as the right wing Institute of Directors (IOD) believe that high levels of tax stifle the economy and that where taxes must exist they should be indirect wherever possible.

In this way, we have seen the gradual reduction of direct, progressive taxation under the Tories, accompanied by a similar increase in the levels of indirect regressive taxation methods -such as VAT and the Poll/ Council Tax.

With the British economy in ruins, and unemployment continuing to rise, the government’s economic policies have begun to lose credibility. Indeed, in the long term, cutting income tax may have damaged the economy because it has resulted in the continuing run-down of improvements to the health and education services, as well as the training, transport and housing infrastructures, by starving the Treasury of capital to invest. To quote a recent Fabian Society pamphlet: “… there are certain things that are the essentials in a modem civilised society”.

The government’s so-called ‘reforms’ of the 1980s are inherently unfair, because they have resulted in a tax system that systematically penalises the lower paid. This is because there has been a switch towards more regressive taxation methods.

The changes have not only penalised those on lower incomes but have positively benefitted those on higher incomes. At present, single people can earn at least £3,295 before they are required to pay income tax. They then pay 25% tax on their earnings until they reach £23,700, whereupon each extra £1 earned is taxed at a level of 40%. This is known as the ‘marginal rate” of tax. It has been reduced over the years from 83% to 60% in 1979, and to its current level of 40% in 1988.

We in the labour movement would like to see a number of changes to the tax system that would go some way to redressing the imbalances that have been brought about by Tory policy and to restore fairness.

What are the Alternatives?

My own union, which represents tax staff in the Inland Revenue, launched a Campaign for Fairer Taxes in 1991, and is looking to promote a system of fairer taxes in the longer term. It is not popular, but there are a number of alternatives that could be employed with the objective in mind. A number of these have been examined in some detail by colleagues in the Labour Party and were contained in the Party manifesto earlier this year. David Blunkett said in a speech to the IRSF conference in 1991 that a nation’s tax system reflects its real values.

There are some ways in which we could reform our current tax system in order to bring about increased fairness and equity.

1 Fairer contributions

The Institute of Fiscal Studies (IFS) produced an interesting study during the election, which showed that nearly half of all the money spent on changes to the tax and benefit system in Britain over the last ten years has accrued to the richest 10% of the population. The average gain for a household with an income of only £50-£100 per week was only £1.42.

Prof. M J Artis, in a discussion paper for the Campaign for Rational Economic Debate, has argues exactly this. The Labour Party proposed that the upper rate of income tax be increased to 50% for all earnings above £40,000 and that this should be accompanied by a higher personal tax allowance.

Taken together, these measures would be a very effective way of reducing, in real terms, the burden of tax on the lower paid (IFC Commentary 29) and effect a significant redistribution. There are those who would argue that this higher rate of tax will destroy incentives to work. But in reality, the evidence of such incentive effects is very scarce. Even the IOD has been unable to come up with any credible examples of this happening.

2 Reform of the present NIC System

With a reform of the current NIC system, which in truth is simply another form of income tax, further redistribution could take place. There can be no doubt that the current system contains a number of anomalies, which serve only to penalise the poor.

Whilst no contributions are due at all on incomes under £54 per week, as soon as incomes rise above this level a flat rate charge of 9% is levied regardless of income. The unfairness is further exacerbated when, for no explicable reason, the rate drops to zero once earnings rise above £21,060 per year. This ceiling is obviously thoroughly inequitable. Proposals to abolish the higher rate NIC ceiling are welcomed by those in favour of a fairer system. Ultimately there is no reason why the income tax and NIC systems could not be combined.

3 Bringing Taxes and Benefits closer together

There is a compelling logic that argues that the taxes and benefits systems should be taken together, as in many ways the two are inextricably linked. Any comprehensive redistribution package will need to address both issues. This would ensure that all those entitled to benefits receive them automatically. With the capabilities of modern technology, this is no longer such a fanciful idea as it used to be. Within the context of equity and redistribution it would ensure that fewer people become subject to the poverty trap, which currently deprives thousands of a decent living standard. It could also go some way to ensure that any rebate scheme was carried out more efficiently and effectively.

4 Independence for Women

Because our tax system overburdens those on lower pay, it also disadvantages women, since two thirds of the low paid are in fact women. It seems very unfair that a shopworker on £60 per week has to pay the same rate of tax as her store manager on £23,000 a year! Almost half of all women in employment work part-time. Consequently it is they who are most affected by national insurance thresholds and they may be ‘trapped’ into low pay.

On top of this, women are still being treated as second class citizens when it comes to income tax. The Conservatives’ proposals for independent taxation do not fully address the discrimination currently operative. The new married couples’ allowance will still result in the man paying less tax than a married woman on the same income. Proposals to phase out the married couples’ allowance gradually would go some way to redressing the imbalance. Along with measures to provide better child benefit, childcare and a national minimum wage, women would become more independent and be treated more fairly within the tax regime.


European Commission proposals to remove the zero rating from VAT on items such as food, books and children’s clothing would impose new burdens on the poorest in society. The poorest would suffer disproportionately. There can be no justification for this regressive move.

6 Resourcing the Inland Revenue

I would also like to touch on something that is quite close to my own heart – the resourcing of the Inland Revenue.

Latest government plans are to reduce the number of staff and the resourcing of the Inland Revenue over the next decade or so. The IRSF would not argue against a more efficient Inland Revenue department, but there are some things that could be done, with minimal costs, that would improve efficiency significantly. At the moment, significant amounts of tax assessed by my members are simply not being collected because there are not the resources and staff to do it. Last year (ending October 1991) the Inland Revenue remitted £900 million and this year the figure will be over one billion pounds. Imagine what we could do with that money, if we could get hold of it!

In conclusion I would like to leave you with this thought. During the General Election, the IRSF amongst others tried to raise the level of debate amongst the general public on taxation and tax-related issues. We ran a series of articles in the national press that pointed out the inadequacies of the Tory party tax policies. I believe – and I hasten to add that all the evidence showed – that when confronted with the arguments the majority of people conceded that many of the Labour Party’s proposals were indeed the fairer.

Why then did they turn it down so overwhelmingly in the polling booth? And why, during the election post mortems, did John Smith receive so much of the blame for the Labour Party’s defeat? One can only assume that in Britain people behave very selfishly once they enter the polling booth, despite all the compelling arguments.

But to end on a slightly more positive note, there is some light at the end of the tunnel. In America the political tide seems to be changing – and the election of Bill Clinton represents a demand for change which America has not experienced for over a decade.