Income inequality and Labour’s mild tax reforms

Labour’s planned tax rises for those earning over £80 000 have attracted their fair share of controversy.  While these will  affect  comparatively few (around 5%),  some critics argue that Labour would have to impose wider increases in income tax to pay for its program. But as the graph below shows  opportunities appear  limited.  Levels of income fall away quite dramatically. The  income structure is now very different to the post-war pyramid. Though 1 in 5 might officially be considered ‘poor’, many more are almost or nearly poor. In other words, somebody at the ‘medium’ or middle position would have more in common with those below than those towards the higher end of the income scale.



The ‘hollowing out’ of the middle has been well documented. It’s linked to the automation of traditional office work and the bite-sizing of post-war professional work. Although over 20% of the workforce are in jobs that the Office for National Statistics (ONS) considers  ‘professional’, with another 14% ‘associate professional’ or ‘technical, their pay levels hardly reflect this!  But income tax in the UK contributes about 25% of government revenue (corporation tax well under 10%). It’s calculated that the proposed increases for the 5% will generate an extra £5.4 billion. Yet as society continues to polarise and as Artificial Intelligence (AI)  advances, the numbers in this higher category can’t be relied upon.

If it’s not going to tax lower earners,  then how can Labour raise enough money  to finance day to day expenditure?  For a start,  in many other northern European countries the top 5% pay much higher rates. Labour also plans a higher tax on  the top 1%, who, evidence shows, have been pulling away from everybody else. There are no details  yet, but the 2017 Manifesto included a 50% tax rate on incomes above £125 000.  While many of those with £125 000 income, even double that, are  ‘salaried’ employees  who’s tax will be deducted at source,   the same cannot be said about the ‘super-rich’ however, where evidence also shows that the further up the top 1% you go the more likely you are to have the personal, social and economic resources to ‘avoid’ paying your full wack.  As inequality widens,  social-democratic governments have not been able to, or have been reluctant to really confront the rich

Labour has pledged to restore corporation tax to previous levels  (back up to 26% from 19%). It’s unlikely this will deter capital investment (already at an all time low despite rock bottom interest rates).   Of course, the  ‘tech’ monopolies continue to make huge profits  make from  price mark ups on goods and services with a ‘zero-marginal cost’  (costing little, if nothing to produce) but here again progressive governments across Europe (as well as the EU itself) face huge difficulties in both locating as well as collecting these.

Rather than being dependent on successfully chasing tax dodgers (and also being dependent on economic growth to generate enough revenue) Labour  could alter its ‘fiscal rules’  – it  says it will only borrow for ‘investment’ not current spending and will ‘balance the books’, in other words, cover expenditure with income, over a Parliamentary cycle. But even if its Treasury team reject the thinking behind ‘modern monetary theory’, levels of UK public debt also remains much less than in many other countries and with interest rates so low, there’s huge potential for domestic borrowing (through issuing new savings bonds) from a public who support both its Green New Deal and its commitment to the NHS.




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