The 1% and their “fair” share.

“You know what the elites are really afraid of? Paying their taxes.”

This is a recent tweet from Labour leader and possible future Prime Minister of the U.K., Jeremy Corbyn.

Labour have built a campaign around the notion of “For the many, not the few”, a belief that Tory “austerity” has led to a decrease in functionality of the NHS, and a cut to a raft of social programs which has hurt the poorest in society.

They believe that for the UK to prosper there needs to be a rebalancing, and that the rich will have to pay their “fair share” via new, higher taxation, which will be used for public infrastructure, the NHS, improved social welfare programs etc.

This is predicated upon the belief that the rich are not currently paying their “fair share”, that Tory tax policies have left the rich off easy and that those at the top use various loop holes to skirt around paying what they should.

The question is…is this true? Do the rich not pay their fair share? Is the British taxation policy skewed towards the elites, at the expense of the ordinary Briton on the street?

Let’s discuss.

First, we have to delve into the semantics. What is “fair”?

It’s a word I largely dislike in political/economic discourse.

“But Cathal, how could you possibly have an issue with the word fair…Surely it only has good connotations”

Well, reader, that’s kind of the point. It’s a nice term that is literally undefinable in a political context.

What is a “fair” level of tax? I don’t know…do you?

Politicians love using the term fair, precisely because it’s undefinable. It can mean literally anything they want depending on what their beliefs are. Whatever policy they want to implement is done in the interest of “fairness”, and who can argue with making things more fair?

For example, Labour wants to raise the UK corporate tax rate to 26% from 18%…in the interest of “fairness”. The belief being that massively profitable multinational companies should be paying a fairer share.

What specifically is fair about 26%?…why not 27% or 25%?

It’s because taxation rates have little to do with “fairness”, and everything to do with providing revenue for the politician in questions specific policies, and most importantly, to be SEEN to be fair by the voting public.

Whatever tax rate is needed to pay for said policies is where the tax rate is going to be set (although politicians/governments tend to be poor at being able to project how much taxation their policies will generate).

“Fairness” has been used more prevalently in recent years when discussing the richest 1% of any given population. The argument being that since so much wealth has been accumulated by the richest 1%, policies need to be enacted to redistribute money from this 1% to the remaining 99%. Many argue that the richest 1% have benefitted from low taxes and that taxation has unfairly benefitted them at the expense of the other 99%…but is that true?

Who are the 1% in Britain?

If you make over £160,000, you are in the top 1% of earners. For the absolute elites in the 0.1% bracket, you have to earn £650,000.

The 1% comprises about 310,000 individuals.

They earn 14% of income in the UK.

They pay 27% of all income tax. This is up from 21% at the start of the century.

So, to repeat, 1% of the population makes 14% of the income, but pays 27% of all income tax.

They pay almost twice their PROPORTION of taxation.

43% of working age people pay no income tax. This number has risen noticeably in recent years due to the governments increasing of the tax free allowance.

To be clear, in the era of austerity, the percentage of income tax paid by the wealthiest has gone up significantly, and the percentage of income tax paid by the poorest has gone down significantly.

Is that fair? If not, what is?

In America, which is often held up as some ultra capitalistic market economy, the percentage is actually much higher. The richest 1% pays 37% of all income tax.

Is that fairer than the UK? I don’t know, because fair has no strict definition in these cases.

The dictionary definition of the word “fair” is listed as “treating people equitably without favouritism or discrimination”

Well, saying you’re going to tax some people one percentage and another group of people a different percentage, would appear to be both discriminatory and using favouritism….doesn’t it?

Equitable can mean different things to different people.

One person could argue that “equitable” could mean everyone pays the exact same amount. Everyone pays an equal amount, therefore that’s a definition of equitability.

Another person might state that, that is unfair as the poorer person pays a disproportionate amount of their income, so the solution is that everyone pays the same percentage. So, everyone, whether they make £20,000 of £20,000,000 a year, would pay 20% of their income to the state. This is known as a “Flat tax“.Thats their definition of equitability.

The current system in the UK is a “progressive” form of taxation whereby, there are different tax bands for every pound earned beyond certain salary levels. In the UK currently, the bands are as follows.

0-12,500- 0%

12,500-50,000-20%

50,000-150,000- 40%

150,000- 45%

Is this fair? I’ve no idea.  Using a dictionary definition of fairness, it’s noticeably unfair..

Politicians can say they’re going to make the richest 1% pay more in taxes and do so while being completely at ease.

Why?

Because no one ever lost an election by appealing to 99% of the population and saying that the 1% are screwing it up for everyone.

Like it or not, theres a name for this type of ideology. Populism.

This all ignores the argument, that at some point, rich, mobile people could just up sticks and leave to become tax residents of Monaco, Switzerland, Cayman Islands etc etc. If this occurs, then tax revenue DECREASES.

It’s nearly impossible, however, to say how many people would leave, if any.

There is however, precedence, as France had to scrap its 75% top marginal rate of tax after less than 3 years, due to an outflow of wealthy citizens along with capital flight.

The Laffer Curve suggests that at a certain point in the taxation scale, tax payers will be incentivised to move their money or simply not work anymore, yet again, leading to LESS tax revenue. A simple example is to imagine 0% taxation rates, what revenue do you get? 0. If you set taxation rates at 100%, what revenue do you get? 0, as no one would possibly work if they thought all their money would be taken.

The take away is this. The term “fair” is malleable, and used by those declaring it to suit their specific agenda.

The 1% by essentially any definition of the word, currently pay a fair share in Britain, and that politicians simply use this notion of the elites not paying enough taxes as a populist means of gaining electoral advantage.

Fun fact: If you make more than $32k, E29k or £23k per annum, you are in the global 1%…you filthy rich pig.

The 1% (You)

 

 

 

Brexit and The FTSE 100.

Yesterday was the 3rd anniversary of everyones favourite talking point, The Brexit Referendum.

In the off chance that you’ve been living in a cave, with your hands over your ears and no access to wifi, the referendum was a vote put to the British public, asking them whether or not they wished to leave the political and economic collective known as The European Union.

The voting public chose to leave.

Since then there has been constant confusion, delaying, anger and more confusion. The U.K. was supposed to have left The E.U. at the end of March 2019. The deadline was extended when a deal negotiated by the Theresa May led government and Brussels could not pass through the U.K. parliament.

Now we are told that October 31st is the new break up date…but even that isn’t likely to be the final date. It’s going to have more break up dates than Ross and Rachel. (Thats right kids! This isn’t your daddies economics blog!)

The predictions for the economic fall out from Brexit have ranged from “Britannia will rule the waves once again, as our dare-doing privateers go forth in search of new trading opportunities” to ” It’s going to be a Mad-Max-esque hellscape but with less cheese“.

The general consensus from economists has been that, at least, it won’t be a positive for the British economy, due to the disruption in trading with its largest trading partners.

However, one of the more noted financial indicators in Britain, the FTSE 100 Index of stocks, has risen 20% since the referendum.

Why is this?

Essentially there’s 2 reasons.

The make up of the FTSE 100

The FTSE 100 is the 100 companies that are listed on the London Stock Exchange with the highest market capitalisation. Total capitalisation of the index is approximately £2 trillion.

While they may be listed on the London Stock Exchange and regulated by U.K. financial law, many of the largest companies are not heavily reliant on the health of the British economy.

For example many of the worlds largest commodity linked companies are listed on the FTSE 100. Miners like Rio Tinto and Anglo American which are Australian and South African based rely very little on the British economy as their operations are largely centred in commodity producing regions like Australia, South America and Sub Saharan Africa. Their consumers are more and more centred in the growing Asian economies, such as China.

This is the same for large energy producers on the Index such as BP and Shell (Shell being the largest company on the FTSE). The majority of their production is outside of The UK in oil/gas producing regions, and their market is worldwide, of which the UK only makes up as small percentage.

Financials also make up a notable chunk of the index.  Standard Chartered for example is a bank that has traditionally focused on emerging markets, which can be seen by the fact that 90% of its profits come from Africa, Asia and the Middle East.

HSBC(Hong Kong Shanghai Banking Corporation), the most profitable bank on the planet, which as its name suggests has traditionally focused on the Asian markets but is now a truly global entity is also listed. It has the second highest capitalisation on the index.

From these examples, we can see that for many of the major players in the FTSE 100, the economy of the U.K. isn’t a major component of the overall success of these firms.

As many of these firms are among the very largest in the index and because the larger the company the greater the affect it has on the overall index (The FTSE is calculated using a weighted average), the more these global firms skew the value of the index.

Perhaps a better indicator of the health of the economy would be if one was to look at the success of the FTSE 250, which includes smaller companies(from 101-350), most of which are British based companies which rely on the British consumer.

The affect of GBP depreciation.

While the FTSE 100 may have increased 20% in value, it must also be noted that the value of the British Pound Sterling (GBP), has depreciated 12% in the same time range.(Using the U.S. dollar as a comparison).

As the GBP decreased in value, the “value” of the shares will increase in numerical terms. As all shares on The London Stock Exchange are valued in GBP, it will appear that their “value” has increased, although all that’s truly happened is that the currency they are now priced in, is worth less. Their true value is largely unmoved.

Once we know this, we can see that a large proportion of the “increase” in value of the index is simply the fact that the companies on the index are now priced in a currency that is noticeably less valuable.

Overall, it is hard to say how much of an impact Brexit has had on the British economy. Despite the seeming cloud it has cast over the nation, unemployment is the lowest it’s been since the mid 70s. It remains among the most prosperous nations in Europe despite under-performing other major European economies in recent years.

It is however important to say that while Brexit has been voted for and signals have been sent about what a post Brexit relationship with The E.U. will look like, Brexit itself has yet to come to fruition. It will be impossible to truly tell the effects of Brexit until perhaps a decade or more into the future.

All that can be said from this article is that the results from the FTSE 100 are not an adequate representation of the health of the overall UK economy due to its results being skewed towards global firms, whose reliance on the British economy is minor, and due to currency exchange rate fluctuations upon which shares are priced.

For whats it’s worth, I’m pretty sure there’ll still be cheese….fingers crossed.