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We need a progressive tax system By Ruth Levitas By 2001, the combined effect of Income Tax and National Insurance on earned income was hardly progressive at all. In 2001, those paying standard rate Income Tax at 22 per cent were in fact paying 32 per cent. Those with taxable incomes over £28,000 were above the upper earnings limit for National Insurance, and thus paying 40 per cent. Against this background, the use of the 1 per cent rise in National Insurance should be greeted with ambivalence. The fact that it breaches the upper earnings limit without a great fanfare of abolishing it is wholly congruent with a minimalist policy of "redistribution by stealth" - although the actual redistribution has been so minimal that there seems little point in the stealth. The abolition of the upper earnings limit has often been proposed as a way of levying additional taxes on higher earners. On the other hand, this would mean an additional 10 per cent tax kicking in at a relatively low point in the income distribution, and would not address the very high "earnings" in the increasingly dispersed top 10 per cent of the income distribution. In addition, National Insurance intrinsically taxes earned income more heavily than unearned income. When Blair was interviewed on Newsnight about this Budget measure, he said that it wasn't like income tax because it wasn't paid on pensions and savings. Presumably we were meant to think that he was exempting struggling grannies from an additional tax burden. But it is of course the richest groups that derive the greatest rewards from unearned income on investments - and in the last decade, the distribution of wealth, like the distribution of income, has become more unequal. There is an urgent need to combine Income Tax and National Insurance, and to restore a properly progressive tax system. Raising income tax for those on high "earned" and unearned incomes is essential to reduce inequality, or even, perhaps to prevent it from continuing to rise. So far, Labour's mildly "redistributive" Budgets may have stemmed the rise but have done nothing to reverse it. Yet the rise in inequality between 1979 and 1997 wiped out all the gains of the previous 80 years. By 1999, Britain was more unequal than it had been for 100 years. The share in national income of the bottom ten per cent of the population had halved from 4 per cent to 1.9 per cent, and indeed the poorest were worse off in real terms in 1997 than in 1979. The share of the top ten per cent had risen from 20.9 per cent to 29 per cent. The top thirty per cent had the same share of income as in 1938, while the share of the bottom 30 per cent had dropped from 15.4 per cent to 11 per cent. This staggering reversal of long-term trends resulted from three main factors: restructuring of the economy and rising unemployment; rising disparities in earnings, especially male earnings; and tax and benefit policies. In particular, benefits were squeezed both in monetary terms and in terms of limiting eligibility; the top rate of tax on earned income was slashed from 83 per cent to 40 per cent, and corporation tax fell from 52 per cent to 33 per cent before the cuts in the 2002 Budget. If these huge cuts in taxation effected a redistribution of income to the richest, equivalently large changes will be needed to substantially reverse it. In this context, a 1 per cent rise in National Insurance rates is trivial. The alternative proposals of the Plant Commission, or David Byrne's more radical suggestions, are less extreme than they seem, and may well not be radical enough. Ruth Levitas is a Professor in the Sociology Department at Bristol University and the author of The Inclusive Society? Social Exclusion and New Labour, Macmillan Press, 1998. |
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