Some of the wealthiest people in Britain are getting away with paying a lower rate of tax than someone earning just £15,000, according to a new study from Warwick University and the London School of Economics (LSE).
Researchers at the universities analysed anonymised HMRC tax returns of higher earners and found that the average person with £10 million in total remuneration had an effective tax rate of just 21 per cent – less than someone on median earnings of £30,000.
One in ten people receiving more than £1 million paid a lower rate than someone earning just £15,000.
The very rich are able to – entirely legally – reduce their taxes by structuring their affairs to take their remuneration as capital gains and corporate dividends.
The researchers estimate that up to £20 billion extra in tax could be raised by the government if it taxed capital gains and dividends at existing headline income tax rates, which is 45 per cent for those receiving more than £150,000 a year.
Alternative minimum tax
However, in recognition of the fact that some rich people do pay a higher tax rate, the report’s authors – Arun Advani of Warwick University and Andy Summers of the LSE – instead recommend an “alternative minimum tax” (AMT).
This would require those receiving more than £100,000 – from all forms of remuneration – to pay at least a 35 per cent tax rate on their income plus gains. They calculate that this would raise around £11bn.
“Instead of asking, can the rich pay more?, a better question may be: who amongst the rich is not paying their fair share?,” they write.
This method could be better suited to countering offshoring than the traditional route of raising income tax rates on higher earnings.
Tax havens
Public finances have come under scrutiny following the coronavirus crisis.
On the business front, both Scotland and Wales have moved to ban Covid-19 support to firms based in tax havens.
Emergency legislation voted through parliament will prevent millions of pounds in funding going to companies which don’t pay their way north of the border.
Those who are registered in tax havens, or are a subsidiary of an offshore company, will be prevented from getting support.
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