Britain’s regressive tax regime fosters a regressive recovery

Loading the dice? Facundo Arrizabalaga/EPA

The evidence is mounting about how regressive the UK tax system has become under the coalition government.

Our work for the Sheffield Political Economy Research Institute (SPERI) highlighted how those taxes generally thought of as “regressive” have come to constitute a growing proportion of the UK tax base. Specifically these taxes – which include VAT and a range of flat-rate duties – constituted 25.4% of total UK taxation before the financial crash but in the 2012/13 financial year constituted 28.4%.

On the other side of that coin, taxes which can be thought of as “progressive” or related to businesses have declined in their significance to the Exchequer. Progressive taxes – generally levied on earnings and other wealth transfers – fell from 57.9% to 53.8% between 2007/8 and 2012/13. Taxes on businesses – most notably corporation tax and business rates – fell from 13.6% to 12.3% in the same period.

Another piece of research released this month bolstered the case for the regressive character of the UK’s current architecture of taxation. A recent Equality Trust publication showed that the poorest 10% of households in the UK tend to pay a larger proportion of their income in tax than the richest 10% of households. The poorest 10% lose on average approximately 43% of their incomes through various forms of taxation whilst the richest pay only 35% of their incomes.

To clarify, these are not reports calling attention to the issue of tax avoidance or tax evasion – although UK Uncut among others would argue that these are trends are compounded by the existence of tax havens and legal loopholes exercised by the likes of Vodafone, Starbucks, Amazon and Topshop. These reports instead illustrate the regressive tendencies of the UK tax system by design. It is, of course, absolutely right to highlight tax evasion and the costs of this to the UK exchequer, but the trends shown in these reports have been brought about by policy action rather than through a lack of international cooperation in tackling evasion.

Tax haven Britain

Indeed, in the government’s incremental reduction of the main rate of UK corporation tax (it will plunge to 20% in April 2015) it could be argued that the UK itself is being transformed into a form of tax haven through the policies of David Cameron and George Osborne. Interestingly, the SPERI report noted that even by the Office of Budget Responsibility’s own estimates, the tax yield garnered by corporation tax will continue to contract even as business profits soar. This in effect means that the UK state will not be a direct beneficiary of the corporate recovery due to the policy actions taken by Cameron and Osborne; leaving a greater burden on other areas of taxation to finance state expenditure.

These regressive trends come at a time of rising income inequality in the UK when perhaps we would expect that those benefiting from an economic system which concentrates wealth in the upper echelons would as a consequence shoulder a larger tax burden. In effect, the reverse seems to be true.

These disconcertingly regressive developments are largely unrecognised by the British public. A poll conducted by Ipsos Mori found a striking disparity between the realities of the tax system and public perceptions of it with the public estimating that the poorest 10% lose only around 24% of their income through taxation; an underestimation of around 19%. Yet in spite of this gulf, a staggering 96% of the British public were found to be in favour of implementing a more progressive system of taxation. Even by itself, this finding seems to lend a great deal of political weight to those calling for a greater dose of social justice in UK taxation.

Political nonsensus

Such a move would of course be contentious. Indeed, it goes radically against the grain of the current political settlement in Westminster. Ostensibly the ideas that underpin this area of policy-making remain framed by assumptions that wealth is best accumulated and distributed by allowing wealth to “trickle down” through unencumbered markets.

It is a philosophy of economic governance which posits that the accumulation of capital by the affluent is likely to stimulate investment and a reduction in unemployment; a philosophy which has remained resilient in spite of repetitively disappointing investment figures and the failure of the market economy to produce well-paid and secure jobs. It is these ideas – often referred to as “neoliberal” – which have instigated the recent tax reforms we have seen in the name of engendering an economic recovery.

While these taxation policies may have been one component of a broader approach to resuscitating growth, it has done so only by allowing prosperity to become more abundant in the affluent upper echelons of British society. Tax reforms can be seen as being one part of what has been called a recovery through processes of “regressive redistribution”.

Regressive taxes have been raised in the name of deficit reduction while progressive taxes have been eased in the name of securing an economic recovery. As such regressive tax reforms contribute to a recovery which is for the few and not for the many; reforms which feed into the exclusionary nature of the economic recovery.