The UK's Broken Tax System and How to Fix It
Politicians need to take note of this
The top 10% of earners in the UK contribute more than 60% of all of the income tax for the country.
“Tax the rich” I hear you scream.
To be in that 10% upper echelon of UK earners, you don’t have to be rich — you just have to earn £65,000 per year or more… That’s not a lot.
When you mention the top 10%, you think all those people have yachts & indoor pools, but the likelihood is, that most drive a second-hand Mercedes.
How Much Tax Will You Pay On Your Salary?
If you earn under £12,570, you’ll pay 0% in tax.
If you earn over £12,570, you’ll pay 20% in tax.
If you earn over £37,700 you’ll pay 40% in tax.
If you earn over £125,140, you’ll pay 45% tax.
That structure creates a very obvious problem.
Tax Avoidance & Loopholes Are Incentivised
The late, great investor, Charlie Munger once said:
“Show me the incentive and I will show you the outcome.”
The problem with penalising higher earners is that it penalises hard work, innovation and production.
This then begs the question…
“What’s the point in working harder when a disproportionate amount of that labour will be taxed?”
So most don’t.
However, those who do, often feel unfairly targeted by this kind of taxation — so they move abroad or take advantage of tax loopholes, like the current Prime Minister’s wife who avoided paying taxes in the UK while having personal wealth in the hundreds of millions.
These loopholes are sought out by companies too.
That £2billion that was lost was from just 7 companies. Imagine how many companies operating in the UK, weren’t in the article — but do the same.
These loopholes and incentives are pursued because the tax system is so unfair.
Breaking Down the Inequality in Percentage Terms
If you earn £65,000 per year, you’re paying 20.6% of your overall income in tax.
If you earn the basic rate of £37,700 per year, you’re paying just 13.3% of your overall income in tax.
Is that fair?
In both examples, the 2 earners would be equally hit by VAT on all their goods, they’d still have to pay council tax, road tax & other relevant taxes.
So this tax system actually creates a disincentive to earn more, as you’ll be paying more of your total income in tax.
It’s this percentage bias that forces companies & the self-employed to ‘reduce their profits’ as much as possible.
In fact, it’s hard to get your hands on this year’s data - but in previous years, 26.7% of Self-Employed people paid no tax at all.
The Icing on the Cake — An Economically Inactive Workforce
According to the House of Commons, 9.38 million people, aged 16-64 are economically inactive. Not working, or not looking for work.
Some percentage of these people will be students, but for those who aren’t, these are people of working age, that are not paying into the system.
It’s also true that 19.3% of all people who work in the UK don't pay tax. Because they earn too little, or they declare that they earn too little.
The burden is then passed on to the approximately 33 million income taxpayers who generate £277billion in income tax for the UK Government.
The Solution: Fairness & Balance
As you can see from this graph, the top 10% pay over 60% of all the income tax in the UK — but they only account for 33.7% of the total income.
Whereas the bottom 50% account for 25.5% of the total income & only 9.5% share of the total income tax.
The solution is to equalise tax across all income levels.
Let’s take 10% as an example.
If you earn £1, you pay 10p.
If you earn £100,000 — you pay £10,000.
Currently, those earning £100,000 would be paying £27,432 in income tax alone.
Being fairer on a fixed percentage of tax would do so many positive things:
It would tax the 19% of workers who pay no tax at all.
Incentivise people to work harder & earn more, knowing their tax isn’t disproportionately increased.
Reduce under-reported income and tax loopholes taken by companies & the self-employed.
Incentivise people to work more hours, knowing that the ‘tax-free allowance’ of £12,570 no longer exists.
Diminish the incentive for non-domicile tax avoidance.
Incentivise people & companies to do business in the UK. Increasing GDP.