Jasmine Razeghi writes on what the tax system in the United Kingdom reveals about what the rich pay in taxes.

In early June, Dr. Arun Advani and Dr. Andy Summers at the London School of Economics presented their research, “How Much Tax Do The Rich Really Pay And Could They Pay More?” with data given by the HMRC about the tax paid by individuals in the UK in 2016. 

Those who were in the top 1% paid 29% of all income tax in the UK. At first glance, that may give credit to the wealthy for a large contribution of tax dollars. However, their contributions could increase if the current tax system transitioned to a progressive tax system and there was a tax on capital gains or investments the same as one’s earnings. 

What The Rich Pay Versus What They Should Pay

Currently, in the UK, there is no progressive tax system. In theory, individuals paid an increased percentage of their income for taxes until they reached the headline rate of 47%. However, this is just what many thought happened.

Dr. Advani and Dr. Summers’ research revealed that on average, the peak amount paid in taxes, or the effective rate on income, is 7% below the headline rate. With the data gathered from individuals who paid with the effective tax rate, the money paid in taxes levels off and eventually has a slight decline after one’s income is more than 600,000 pounds. It did not continue to increase as one’s income increased.

To put the effective tax rate into perspective, someone who earned 2 million pounds, receives 140,000 pounds extra that they could take for themselves instead of putting towards tax. This amount adds up and becomes a substantial amount of money lost because the rich do not pay taxes at the headline rate. If these individuals actually paid taxes at the headline rate rather than what they paid in 2016, there would be an estimated 8 billion pound increase in revenue.

What Could The Government Implement In Order To Make The Wealthy Pay More?

To combat the problem, researches proposed an Alternative Minimum Tax (AMT) of 35%. It would allow for the more fair taxation of individuals and would not allow tax breaks to prevent them from paying a required minimum amount. 3 billion pounds of estimated revenue will flow through the UK economy if AMT applied to income only. Still, if you also impose AMT to capital gains and investments, it would create about 11 billion pounds, a far greater amount.

With this AMT, it would not allow for tax reliefs to be “stacked” in order to avoid paying the minimum tax rate. Though seen as a radical proposal, the UK already limited the maximum amount of relief one can claim. Dr. Advani called it a mere extension of a principle that already exists.