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How much tax is enough?

Summary

26 August 2012

There is a widely accepted assumption that the more income you have, the more tax you should pay. I decided about a decade ago that I was not convinced that this was necessarily fair.

If we regard the state as a joint activity of its citizens, I understand why people with more income should pay more money into the state than do people who have less income. However it is not self-evident that your contribution should increase without limit as your income rises.

I believe that once you have paid a reasonably large amount of tax, the state should not take any more tax from you. It is not administratively practical to apply this to taxes such as VAT or petrol duty, but it feasible to apply it to income tax and capital gains tax. I do not have a particular number in mind; in the piece below I use £4 million of income tax per year for illustration. The proposition would not benefit me; my income tax liability has always been far lower than that number.

I have set out my thoughts in a comment piece on Conservative Home which is reproduced below.

Mohammed Amin: How much tax is enough?

Mohammed Amin is Vice Chairman of the Conservative Muslim Forum. He is writing in a personal capacity.

Over a decade ago I had an epiphany.

As a partner in PricewaterhouseCoopers, once a year I received a statement informing me how much I had earned in the previous accounting year. (Partners do not know their income until the firm has calculated its profits and then calculated the division of the profits amongst the partners.) That statement also told me how much income tax I was paying on my profit share.

At that time my late brother-in-law was living on social security. I did not know how much the DHSS [UK Department of Health and Social Security] was paying him but could guess. It dawned on me that my income tax bill represented several times the amount of his social security payments; say a multiple of five.

Both common humanity and my Muslim religious belief lead me to care about social solidarity. I might fall on hard times for many reasons, and also understand in the case of every unfortunate citizen “There but for the grace of God go I.” Accordingly I support our social security safety net, while wholeheartedly backing Iain Duncan Smith’s improvements to the system. [He is the UK Secretary of State for Work and Pensions.]

However the question I asked myself when looking at my PwC income and tax statement was “When have I done enough for social solidarity?” How many people's total social security do I need to finance before I have done enough for my fellow citizens? In other words “How much tax is enough?”

As far as I can tell, this question is rarely raised.

The socialist answer

The answer from our socialist friends is simple. There should be no limit on the amount that the state takes away from you in tax as your income rises. Furthermore, the greater your income the higher the marginal tax rate that the state should take. At one time they legislated for 98% tax on investment income.

When they are being frank, socialists deny that your income really belongs to you. I recall that Chancellor Gordon Brown would often talk about the amount of income that he had “allowed you to keep” rather than talking about the amount of your money that the state had taken away.

Conservatives appear to have accepted this socialist position. Some may really believe it, while others may regard taking any alternative position as political suicide. In my view there would be major benefits to the Exchequer, and to the country, from adopting the alternative approach below.

The alternative approach

Your income belongs to you, and once you have paid a large amount of tax, say £4 million for illustration, you have done enough for your fellow citizens.

Under this approach, the income tax system would start with a generous personal tax allowance/zero tax band of say £10,000. The next £40,000 of your income would be taxed at 20%. After that your income tax rate would be 40%. (I would prefer to abolish the 40% rate as it raises relatively little tax, but that is an argument for another day.)

Crucially, once your income exceeded £10 million in a year, your tax rate would fall to zero. By then you would have paid £4 million (approximately) of income tax for that year, which in my view represents more than enough social solidarity with your fellow citizens.

There would be anti-avoidance rules to prevent people artificially bunching income into one year, but discussing them now overcomplicates things.

Why this is better for the Exchequer and the country

People do not become tax exiles while their income is low; they only leave when their income becomes high. We can all think of sports stars or entertainers who become tax exiles once they become very successful. Driving successful people away from Britain has several damaging consequences:

Furthermore, by becoming a particularly friendly country for high earning individuals, we would attract them into Britain.

Is this moral?

I share Andrew Carnegie’s view that to die rich is to die disgraced, because wealthy people should give very generously to charity. I believe that the wealthy individual above earning over £10 million (with a marginal income tax rate of zero) has a moral duty to give much of his income to charity. However, the moral aspects of charity and the need to make good tax law never be muddled together.

Tax law needs to be made in the best interests of the country. We are hurting our country’s poorer citizens by over-taxing the rich and driving them out of our country, thereby reducing our total tax revenues and weakening our economy. After a short time, I believe my proposal would dramatically increase total tax revenues, as wealthy Britons stayed and more wealthy foreigners came.

 

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