Anthony Hilton: Why higher earners shouldn’t pay more tax

Labour unveiled plans to tax high earners in its manifesto

REUTERS

18 May 2017

Does earning £80,000 make you rich? Well, according to the Labour party manifesto, it does and compared with the earnings of most of the other people in the country it should, because an analysis by the Resolution Foundation suggests only five people out of every 100 will be paid more than that next year.

But it is highly unlikely that any of the people reading this and earning that amount would think of themselves as rich.

They may concede they are more comfortably off than when they were younger, but that is about all and there is a lot of circumstantial evidence which supports their position.

In particular there is a raft of statistics to show that people between 35 and 50 in this income group are saving very little, which suggests that even if comfortable they are not awash with money.

The wider truth is that, after more than 10 years of stagnant incomes at almost all levels in the UK, the only people who are really saving out of surplus income are those who have got to the stage in life where they have paid off their mortgage and the kids have left home.

It is a moot point to ask of the others, if they are not able to save, whether we can really expect them to pay more tax?

There is a bigger issue though which is particularly relevant to people living in London.

What the manifesto fails to grasp is that it is not the level of earnings which determines a person’s standard of living, but the level of disposable income. This is the amount they have left to spend after they have met essential costs like housing and the fares to get to and from work.

Everyone knows intuitively they have to earn more in London to live as well as someone in Liverpool who appears at first glance to have a lower income and be worse off. However, they would be shocked to realise how much more they need, principally because of housing.

Three years ago when I did this sum, data from Shelter the housing charity suggested that even in a relatively poor London borough like Lambeth the average private rental cost was £17,100 a year. The average cost of similar accommodation in Liverpool was £5500.

Given that the then average income in London was £33,000 a year against a range of £24,000 to £28,000 for the rest of England, this meant people in London earned between £5000 and £9000 a year more than they could expect to earn elsewhere.

But the average Londoner earning £33,000 and living in Lambeth would have £16,000 after housing, while the person in Liverpool even on an income as low as £24,000, would have £18,500.

Even this seriously understates the relative impoverishment of Londoners, and not just because housing today is significantly more expensive than it was just three years ago.

Transport costs are far more significant in the South than they are in the UK’s other towns and cities but everything else costs more too — a round of drinks, a meal in a restaurant, a trip to the supermarket, a night out at the cinema, a trip to the hairdresser.

Take all these things into account and it becomes obvious that people need massively more to survive in London, let alone to live well, than they do in most of the rest of the country. The place only functions because in most households both spouses work, often with more than one job.

Continuing the above comparison the average person earning £30,000 in Liverpool has £20,000 to spend after housing and tax.

For someone in London to have £20,000 to spend they would need to earn not far short of £60,000, almost twice what is needed in Liverpool.

By extension, someone earning £80,000 in London and therefore henceforth to be thought of as rich, is in fact likely to be no better off than someone earning half that amount in Liverpool, Leeds, Newcastle, indeed most of the rest of the country. Admittedly this is a back of an envelope calculation, but it seems about right.

So to be fair, and fairness is the theme running through the Labour manifesto, if higher taxes are to be imposed on those earning £80,000 in London, they should also go up for everyone earning over £40,000 outside because they are equally well off. But I can’t see that playing so well with the voters in Sunderland or Bradford.

There are a couple of further points. One is that it is a bit silly to use income as a measure for whether someone is rich or not without also taking into account what they own.

It would be quite feasible for the Duke of Westminster, whose family trusts own much of the land in London’s west end, to take no income from his employment, but that would not make him poor.

Also the whole idea of wealth depends on who is being compared with whom. I know a multi-millionaire who finds it humiliating to be included in the Sunday Times Rich List because he appears to be really quite poor when compared with the 20 or so billionaires at the top of the league.

A similar thread runs through the amounts regularly claimed by the spouses of millionaires in London’s divorce courts when they are asked to state the minimum amount they should be expected to live on, sums which often run to over £100,000 a year.

This is not to be judgmental but merely to underline how what constitutes being rich is a slippery concept even among the rich themselves, let alone among those writing a political manifesto.

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