Alex Wild: High time to ask some financially taxing questions

BETWEEN now and polling day on May 7, political discourse will be dominated by emotive debate about the public finances.

How far have we come and how much further we should go down the road of fiscal consolidation?

Despite progress in some areas, the overall picture remains dire. Borrowing remains just a shade under 12 figures and public sector net debt is now about £55,000 per household. Simply put, the coalition has failed to meet its fiscal targets miserably.

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But there are much more hotly contested questions. Who is paying too much tax and who is paying too little? Who is getting benefits that they shouldn’t and who should get more? Which budgets should be cut and which should be protected?

It is all very well to talk about tough choices, balancing books and fixing roofs, but the lack of detail being offered makes it almost impossible for voters to rationally decide who, if anyone to vote for.

Whatever you think are the answers to these expansive questions, there is no ignoring the simple fact that welfare, including the State Pension, is the biggest item of spending and forecast to clock in at a massive £215bn this year.

To give that number some context, it’s the equivalent of will be raised in Income Tax, Corporation Tax, Stamp Duty and alcohol duties combined. And since the Government raises the lion’s share of its money by taxing its citizens, taxes and benefits seem like a good starting point for the debate.

Despite all the furious finger pointing at rich people not for paying their “fair share”, not many people realise just how reliant the Exchequer is on a very small group of taxpayers.

How many people know that the top 3,000 earners in the UK pay more Income Tax than the lowest nine million earners for example? A Premiership footballer earning a salary of £5m will pay £2.24m in Income Tax this year while National Insurance Contributions will add up to nearly £800,000. Ed Miliband already has his wish – top earners are paying a 53.4p marginal rate on their income over £150,000. But this stratospheric bill isn’t as high as some people think it should be.

Last year, a household in the top 10 per cent paid an average of £30,000 more in taxes than they received in benefits and services such as the NHS and state education whereas a household in the bottom 10 per cent received an average of £11,000 more in benefits and services than they paid in taxes.

It’s pretty difficult to argue that our tax system isn’t highly redistributive.

Before the Government gets involved, the top 10 per cent of households had an average income 27 times higher than the bottom 10 per cent of households. After taxes and benefits, however, their income was 5.8 times higher.

The assertion that high earners are undertaxed frankly doesn’t stack up. Regional redistribution is also huge. Households in London paid an average of £4,119 more in taxes than they received in benefits and services – by far the most of any region. On the opposite end of the spectrum, households in the North East received £3,175 more in benefits and services than they paid in taxes.

But that is not to say that poor people are not being absolutely clobbered by the taxman as well. In fact, last year the poorest 10 per cent of households paid a far higher proportion of their income in taxes than the top 90 per cent – an appalling indictment of our indirect taxes.

After adding in benefits, a household in the bottom 10 per cent paid an average 47.3 per cent of their income in taxes as opposed to an average of 35 per cent for a household in the top 10 per cent. Taxes such as VAT, council tax and alcohol duties really do hit the poorest hardest.

Temporary cash freezes and changing the inflation index by which benefits are uprated are all well and good, but we should have a much more frank debate about how many people should get benefits.

Far too many middle and upper middle income households are in receipt of some form of working age benefit and pensioners (that high electoral turnout group) are being spared from anything remotely resembling austerity. Policies such as the triple lock, free TV licences, free bus passes and winter fuel payments are fiscally reckless and morally unjustifiable.

Taxes are far too high across the board. The poorest households pay 14 per cent of their income in VAT whilst a household with pre-benefit income of £57,500 ends up paying more than £21,500 in taxes – a ludicrous sum.

The simplest way to reduce welfare spending would be to stop taking so much money off people in the first place. This fiscal churn only serves the interest of politicians who try to convince us they’re being generous. Time for an honest discussion based on facts rather than conjecture and platitudes.

Alex Wild is research director at the TaxPayers’ Alliance.