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International Socialism, June/July 1971

Jim Kincaid

The Rich, the Poor & the Budget

From Survey, International Socialism, No.48, June/July 1971, pp.2-5.
Transcribed & marked up by Einde O’Callaghan for ETOL.

Comparisons are difficult, but most experts believe that in no other industrial society is wealth so unequally distributed as in Britain. For example, it has been estimated that in 1954, the top one per cent of wealth holders in the United States held 24 per cent of wealth, but in Britain the top one per cent had 43 per cent of wealth.

The only up to date official figures on the distribution of wealth in Britain are provided by the Inland Revenue. These must rank among the most misleading and dishonest of all the statistics annually emitted by the British government. The Inland Revenue estimates are not concerned with the distribution of holdings of wealth in the population at large. All that they do is to take note of that part of wealth being transferred each year as a result of death and subject to Estate Duty. But there are plenty of devices whereby the payment of Estate Duty can be avoided. The official figures reflect only the distribution of such wealth as has not escaped through the myriad loopholes left open by the tax system.

Not surprisingly Estate Duty is now contributing a lower part of total government income than at any point over the past 80 years.

Thus, in the period 1908-1915, one sixth of central government revenue was derived from Estate Duty. But over the past few years this tax has only provided one twenty-ninth of total revenue. Michael Meacher has attempted to calculate both the overall amount of personal wealth in Britain, and to put a figure on the cost of tax avoidance. [1] The Inland Revenue estimates total personal wealth in 1968 at £88 thousand million. Meacher’s calculations suggest the real total is three times as great as this – £267 thousand million. Estate Duty currently raises about £380 million a year. If Meacher is right only one seven hundredth part of existing capital is being taxed away each year by Estate Duty. Meacher also argues that productivity gains in Britain over the past 60 years have chiefly gone to capital rather than, labour, and estimates such gains at a little under two per cent per annum.

Estate Duty is cutting wealth by 0.14 per cent each year. Thus increased productivity is inflating the total of personal wealth 14 times faster than Estate Duty is reducing it.

A number of factors have the effect of increasing the holdings of the very rich more rapidly than the average. The richer a person the higher the proportion cf his wealth which will be devoted to the sorts of investment which expand most rapidly in value. In general, equity shares are an exceptionally attractive form of investment. They can attract substantial dividend payments, and offer ample scope for speculative gains by buying and selling on the market. But most of all, improvements in productivity are directly reflected in the capital value of such holdings. Few forms of wealth are more unequally distributed. The Bulletin of the Oxford Institute of Statistics for 1961 reported that the richest one per cent of wealth holders owned 81 per cent of all stocks and shares in companies, and the richest five per cent held as much as 96 per cent of the available total of equity shares.
 

Tax Avoidance

Meanwhile, tax avoidance – the professional activity euphemistically known as ‘tax planning’ – has flourished mightily. To study it is to enter a fantastic world where reality is carefully disguised beneath shifting appearances. For example, a good deal of tax evasion is managed by making it appear that capital is not really owned by those who enjoy its fruits. The basic method here is to vest control of a chunk of capital in the hands of trustees who are paid expenses for this work but otherwise do not benefit directly from the capital. The trustees pass investment income and capital gains on to another set of people who have no legal control over the assets in question. Thus in legal terms, no one actually owns the assets in question, which are left hovering in a kind of tax free limbo. Estate Duty is levied only on what a person actually owns at the point of death. No one has the slightest idea how many such trusts are in existence, nor how much capital is salted away in them. One authority estimates that even in 1961 some £1,700 million of wealth was being administered by trustees. [2] In Barber’s recent Budget such trusts were freed from the periodic obligation to pay capital gains tax.

Furthermore, by a careful distribution of wealth among its various members, one rich family can be presented to the tax authorities as a series of less rich individuals and taxed at appropriately lower rates. This process of redistribution of wealth within the family is also encouraged by the fact that gifts of capital escape death duties if they are made more than seven years before the death of the original owner. The tax system leaves many loopholes available whereby children can be used to reduce the tax obligation of the family unit.-Even babies can be made directors of controlled companies, or can figure as major shareholders in such enterprises. Income accruing to children married under age 21 is free of supertax, so long as such children do not actually become entitled to the income until they are 21. Where a transfer of wealth takes place to children on their marriage, such transfers are exempt even from the rule which says that gifts are subject to death duty if death occurs within seven years of the making of the gift. The tax privileges which are accorded to charities have been greatly exploited by the tax planners. There are innumerable ways in which charitable trusts can be set up whose real purpose is to make philanthropic additions to the income of one’s own relatives and descendants.

The last Labour Government made it a little less easy to use children for tax evasion. The 1968 Budget abolished the rule that children should be taxed individually and said instead that children’s income should be added to that of their parents. This provision has now been reversed in the recent Barber Budget. On the Treasury’s own figures, this concession means a free gift of £15 million a year to wealthier families. In addition the Tories have decided to allow to wives the option of a tax assessment independently of their husbands. As many commentators have pointed out, this is less a concession to the Women’s Lib lobby than a boost to higher income families. Unless the couple’s joint income is more than £6,000 a year, then separate assessment will in most cases involve paying more tax than at present. But at really high incomes, separate assessment is worth a great deal. The total benefit to the rich of this new arrangement is estimated by the Treasury at £12 million a year.

There are, in addition, numerous ways by which Estate Duty can be avoided by the use of life assurance schemes. The total assets of insurance companies in Britain totalled £14,800 million in 1968. A substantial part of this is owned by the wealthiest group in society. Besides death duty evasion, life insurance offers advantages of considerable relief from income tax on premiums paid to insurance companies. The Inland Revenue report that in 1967 138,000 people with incomes of £5,000 a year and over shared more than £20 million in income tax relief on life insurance policies – an average tax saving of about £3 a week for each of the taxpayers involved. By contrast, there were five million people with an income of less than £1,000 a year who held some form of life insurance and received an average tax relief of only 20p a week. [3]

As it is well known, there are many tax advantages to be obtained by converting oneself into a company. For example you can issue tax free bonus and debenture shares to yourself. A great many living expenses can be made to appear as legitimate business expenses. The number of such small private companies has grown remarkably in recent years. Then there are substantial tax concessions to be obtained by ownership of agricultural land and forests. Capital invested in agricultural property can escape 45 per cent of Estate Duty, even if such purchases took place only a few days before the death of the person making the investment. And finally, there are many ways in which British taxes can be evaded by keeping one’s capital abroad. Particularly attractive are countries like Bermuda or the Bahamas where there are little or no death duties. Since 1962, real estate in foreign countries has only escaped British death duties if the owner officially lives abroad. However, if you are prepared to travel a good deal it is fairly easy to get yourself so classified.
 

The Budget and the Rich

I have already mentioned some of the provisions of the recent Budget which are exclusively designed to make the rich richer. The total value of these concessions amounts to £42 million a year, which will fall almost exclusively into the hands of the richest one per cent. But this is only a small part of Mr. Barber’s generosity to the higher income groups.

Estate Duty will no longer be levied on any estate valued at less than £12,500. The previous exemption level was £10,000. Only a minority will enjoy any benefit from this change. For example, around 640,000 people died in 1968-9 but only 38,000 people (six per cent of all deaths) left estates valued at more than £10,000. The Chancellor justified the raising of the exemption ceiling on Estate Duty as necessary to counterbalance inflation. The estate ceiling was raised by 25 per cent. By contrast, old age pensions were raised by only 20 per cent to protect their standard of living.

Next there is a sharp increase in the earned income tax relief on all earnings a person makes above £4,005 a year. Previously a person was freed from tax on one-ninth of all earned income between £4,005 and £9,945 a year, but got no relief on income earned above that level. Barber has now made two changes; there will be no upper limit for earned income relief and this relief can be claimed on 15 per cent of all earned income above £4,005 a year – instead of only one-ninth (i.e. 11 per cent). This innocuous sounding change will cost the Treasury £38 million a year, the distribution of which will be exclusively confined to people with an earned income of over £4,005 a year. As an example, this one change will cut the taxation of a man earning £20,000 a year by about £2,000 a year – or £40 a week.

Two further changes will affect a very large number of income tax payers, but, because of the way the tax system operates, will be of particular benefit to people with exceptionally high incomes. First the tax free children’s allowance is to be increased by £40 a year for each child. A children’s allowance gives a person relief not just from the standard rate of tax but from surtax as well. Any family with two children, paying income tax, but not rich enough to be charged surtax will benefit from increased child allowances by £31 a year. The same size family, but with £10,000 a year, with get £193 from increased child allowances. Of the total cost of just over £200 million in a full year, £25 million will go to families with over £5,000 a year. About 1½ per cent of taxpayers will get 12½ per cent of the total tax cut. Secondly, there is the 2½p cut in income tax first announced last October. In cash terms this reduction is worth more to the rich. Of the £350 million a year cost to the Treasury £60 million will go to the 1½ per cent of the taxpaying population with over £5,000 a year.

Finally there is the 2½ per cent cut in Corporation Tax now added to the 2½ per cent cut announced last October. This five per cent reduction should mean a present of about £220 million in a full year to British business. Since 80 per cent of stocks and shares are owned by one per cent of the population, then it is reasonable to assume that this group of wealthy shareholders will be something like £170 million better off as a result of the Corporation Tax reduction.

All told, Barber has added about £355 million to the wealth or the purchasing power of the third of a million taxpayers with incomes of £5,000 a year or more. That is almost as much as the extra £370 million provided for 7½ million old age pensions, which scarcely restores the purchasing power of the pension to where it stood in the autumn of 1969.
 

Taxation and the Poor

The Government regularly publishes statistics showing the proportion of income taken in taxation from households with various income levels. The figures for 1969 have recently become available, and it is clear from the table below that during the latter part of Labour’s term

of office, the tax system was becoming, if anything, more incqualitarian in its impact.

Between 1967 and 1969 the steepest rate of increase in tax recorded was in the £5-6 a week income group – a six per cent jump in proportion of income lost in tax, compared with an average increase for all taxpayers of only one per cent. In terms of proportion of income lost in taxation, the poorest groups continued as before to pay not much less than those with high incomes. At all levels from £16 to £60 a week, the tax system shows up as virtually non-progressive. The figures reflect the heavy weighting in the British tax system of purchase tax, social security contributions, and local authority rates. It is also the case (see discussion in IS 46) that increasingly in the. last few years people on low incomes have found themselves paying income tax. The main reason for this is that the Labour Government did not raise the level at which income tax starts so as to match the rate of inflation. By 1970 the income tax starting point was well below the Supplementary Benefit poverty line income.

In the recent Budget, the Tories took two steps which, they argue, will help to make the tax system fairer and more progressive. The tax free children’s allowance is to be increased by £40 per child. And second, the forthcoming increase in national insurance contributions is to be levied as a proportion of earnings between £18 and £42 a week rather than being added on to the basic flat-rate contribution which every employee must pay however low his earnings. In families with one or more children, the effect of increasing the children’s allowance is to raise the level of income above which income tax starts to bite. The result of this change is illustrated in the following table:

A person pays income tax at the rate of 30 per cent of all income which he earns above the particular tax threshold which operates in his case. The Tories are raising tax starting points a little above the official poverty line for all families, except those with no children or only one child. For example, for a wage earner with a wife, but no dependent children, the official poverty line is £13.40 a week; the Supplementary Benefits Commission allow a total of £12 a week (rent included) for a married couple, and for a man in employment £1.40 a week has to be added on for his national insurance contribution and for the costs of travel to and from work. Even for families with more than one child, the income

tax starting point will remain desperately low. A man with no more than the average industrial wage (about £26 a week) will still pay 30 per cent tax on £5.50 of his income, even if he has a wife and three of a family. It follows also that any wage demand – even if only designed to maintain, rather than improve a given standard of living – has to allow for the fact that the overwhelming majority of workers now pay 30 per cent in income tax out of each extra £1 earned.

To help finance the increases in social security benefits promised for the autumn, national insurance contributions are once more to be raised. At present national insurance represents a massive burden of taxation on the lower paid. All male employees in full time work have to pay a flat-rate contribution of 88p per week, no matter how low their income as well as an earnings related contribution which is levied on income above the level of £9 a week. For example a man with £14 a week gross has to pay nearly 25p of graduated contributions as well as the flat-rate 88p – in all more than one-twelfth of his income being absorbed by national insurance alone. In deciding how to increase national insurance contributions, the Tories have followed the precedent set by the last Labour Government, which was increasingly to shift the main weight of the burden on to the higher paid section of manual workers and the lower paid section of white collar workers. But still the rich escape lightly, and so do those in the more affluent sections of the middle class. National insurance contributions are not levied on unearned income, and any earnings above the level of £42 a week will similarly be exempt. The higher a person’s income, the lower the proportion of that income which has to be paid into the national insurance scheme.

Benefits and the Poor

Social security benefits are to be increased from September 20. Old age pensioners, the sick, the widowed and other groups involved will have to wait six months before an urgently needed increase in benefits actually begins to be paid. National insurance benefits are to be increased by 20 per cent over the levels set in the autumn of 1969. In the 16 months between October 1969 and February 1971 the Retail Price Index rose by 11 per cent. However, the rate of increase has recently been accelerating, and over the three months up to February there was a rise of nearly one per cent per month in retail prices. Substantial increases in food prices are expected this summer, partly because of changes in the subsidy system for British agriculture. To ease Common Market entry the Tories are switching to subsidies made via higher consumer prices for food, and cutting subsidies from taxation. It is likely that the higher social security benefits to be paid in the autumn will then have a lower purchasing power than was the case at the time of Labour’s last increase in the autumn of 1969.

In any event, not all those dependent on national insurance benefits will get the full 20 per cent increase in the autumn. For the Supplementary Benefits scale is to be raised by ten per cent only. The large numbers on National Insurance who depend on this additional assistance to bring their incomes up to the poverty line will find that half their national insurance benefits increase will be docked off their supplementary allowance.

The Budget provided no sort of help for those in poverty because of the lowness of wages paid in a broad range of jobs in the British economy. The increase in children’s tax allowances brings no sort of relief to groups with incomes too low to be taxed, nor does the small reduction in the standard rate of income tax. The sole concession which the Tories have recently allowed to low wage earners is an improvement in the Family Income Supplement scheme which will start to operate in August. Families with incomes below a given ceiling will be entitled to a weekly payment of one half of the difference between their income and the ceiling. However the arrangements for ensuring that people who might qualify for this subsidised addition to wages actually get the extra cash are haphazard. There will be a publicity campaign in the mass media to encourage people who think they may qualify to apply to the Supplementary Benefits Commission for the means test. But it is scarcely possible to explain a complex administrative, scheme with the seductive lucidity of a detergent advertisement.

The same applies for the various schemes whereby exemption can be claimed from the increased charges for a whole range of welfare services. The complications are bewildering – for a married couple with one child, the income ceilings below which exemption can be claimed are: for school meals £17.25, for free prescriptions £18.10, for free milk and welfare foods £19.30, for free optical or dental treatment £19.55, as well as £18.00 for the Family Income Supplement scheme. Any change in family income will modify entitlement to exemption. The arrival of a new child or an adolescent leaving home or a wife stopping work means changes in the qualifying conditions. Not surprisingly, in existing schemes an enormous number of people who are formally qualified do not succeed in actually getting the exemption. To take one example, out of an estimated 190,000 families entitled to free welfare foods, only 2,000 get exemption.

On the other hand it is certain that the increased health service and welfare charges will deter people from using the services. The Sunday Times of May 2 reports that since school meal charges went up at the start of April, more than half a million children have stopped taking school meals. Almost without exception the professional associations representing doctors, dentists and opticians have protested against the increases in charges on the grounds that health standards will deteriorate.

Increasingly the welfare state is becoming a system of means-tested entitlement, rather than of rights. Charges for social services are rapidly becoming a major cause of poverty for anyone who cannot successfully negotiate the intimidating jungle of multiple means-test procedures. More than that, the recent changes in taxation and welfare charges have produced the most bizarre consequences. For example, it is now the case that a man with two children and an income of between £17 and £23 a week will actually end up with less money to spend than he had before if he has the misfortune to get a pay increase of one or two pounds a week. Between £17 and £20 a week he will lose half of his wage increase because his family income supplement will be cut accordingly. He will also be liable to lose rent and rates rebates if he is getting those. The increased weight of the graduated contribution in national insurance means the further removal of a chunk of each extra £1 earned. The family allowance clawback will start to take its toll. At £18.10 he starts to pay income tax. If he goes over £20 a week he will start to lose exemption to free school meals for his children, and exemption from a variety of other social service charges. The same holds good for men with one child, or with more than two, except that the band of income affected will be higher or lower depending on family size.

The general consequence is that for incomes above the poverty line but below the average industrial wage, the effect of a wage increase will be to leave families in a worse financial position than before – unless such a wage increase was really substantial, say £5 or £6 a week. Thus for a broad section of workers, ‘moderate’ wage increases will now be only a way of ending up poorer than before. Only exceptional and successful wage militancy can produce any improvement in standards of living.

 
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Notes

1. In a useful discussion shortly to be published by the Fabian Society.

2. V. Revell, The Wealth of the Nation, Cambridge 1967.

3. See Inland Revenue Statistics 1970, table 96.

4. (i) Income here means all pretax income including family allowances, old age pensions and other social security benefits.
(ii) Taxation here refers to all forms of personal taxation, on income, oh consumer goods, local rates, national insurance contributions, etc.
(iii) Source: Economic Trends, February 1971.

5. (i) All children assumed to be under 11.
(ii) These thresholds assume that family allowances are included in earned income. The family allowance clawback introduced in 1968 means that the taxpayer’s personal allowance (i.e. for a married couple £465 a year of income freed from tax) is reduced in respect of each child after first. The figures in the table take account of this reduction.

6. This table refers to both flat-rate and graduated contributions combined. In the previous discussion I have been speaking only about the employee’s contribution. In each case the arrangement is that the employer adds about the same amount as his employee pays.

 
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