“Next April, David Cameron will be writing a cheque to each and every millionaire in Britain for £40,000.”
Ed Miliband, Andrew Marr Show, 30 September 2012
As Labour delegates gather in Manchester this week for the party’s annual conference, there has been speculation in some sections of the media that leader Ed Miliband will use his showpiece speech to “kick off a class war“.
Appearing on the BBC’s Andrew Marr show yesterday, the man himself did say that if he were currently Prime Minister, he would reverse the decision made in this year’s Budget to cut the additional rate of tax from 50p to 45p.
According to Mr Miliband, the Prime Minister will be ‘writing a cheque’ worth £40,000 to every millionaire in the UK as a result of this decision.
However City AM Editor Allister Heath accused the Labour Leader of an “appalling untruth“, arguing that this claim was based upon “distorted statistics”.
So what are we to make of the Leader of the Opposition’s assertion?
Where does the ‘£40,000 cheque’ come from?
The 50p tax rate – or the additional rate of tax to give it its official name – was introduced in the 2010/11 financial year, and currently allows the Treasury to take 50p from every £1 a taxpayer earns over £150,000. From April these earnings will be taxed 5p less.
If you earn over £1 million per year in taxable income, Mr Miliband calculates, at least £850,000 will be subject to the additional rate. Currently, that would mean that you contribute £425,000 through the top rate of tax.
Under the 45p rate, you would pay £382,500, a difference of £42,500, meaning that £950,000 is the minimum taxable income needed to save the £40,000 identified by the Labour leader.
What is a millionaire?
However there is a problem with this analysis. A ‘millionaire’ isn’t someone with an annual income of £1 million or more, but is usually understood as “a person whose assets are worth at least a million pounds” (Oxford English Dictionary, emphasis added).
While the distinction might seem small, it has some profound consequences for how we understand Mr Miliband’s remarks.
For starters, there are far more millionaires than there are people earning over a million pounds a year.
HMRC estimated that there were at least 322,000 people with personal wealth of at least £1 million in the UK between 2008 and 2010 (modelled on a sample of estates subject to grants of representation).
By contrast, the number of people earning over a million pounds each year is much lower, with just 6,000 paying income tax on earnings over this threshold.
We can’t even be sure that this rarefied group earning at least a million pounds a year are millionaires, as heavy debts could mean in theory that the high-earner in question sees relatively little of the money he or she has earned.
Conversely, some asset-rich millionaires might not earn a taxable income at all, meaning that they are completely unaffected by the change to the top rate of tax.
What if we look beyond Income Tax?
Allister Heath concludes in his piece that “in reality, the coalition has increased tax on some (but not all) people with lots of wealth.”
This, he argues, is because rises in other forms of taxation such as Stamp Duty, Inheritance Tax and Capital Gains Tax more than compensate for the cut in the additional rate of tax.
While it can be difficult to measure the impact that these changes will have specifically on millionaires, there is good reason to believe that he is right.
For instance, the Treasury calculates that in 2016/17 the increase in Stamp Duty to 7% for house purchases above £2 million will in itself bring in nearly three times the amount that will be lost through the cut in the additional rate (£300 million to £110 million). The so-called ‘Tycoon tax’ – which caps the sums that can be claimed in tax relief – is also expected to net the Treasury £300 million, mostly (as the name suggests) from richer taxpayers.
A similar picture is true if we consider earnings rather than wealth: the Office for Budget Responsibility concluded that the 10% highest-earners would be those who stood to lose the most from the cumulative effect of the tax and benefit changes, in both cash terms and as a proportion of their incomes:
Ed Miliband is wrong to say that “each and every millionaire in Britain” will be £40,000 better off when the 50p top rate of income tax is cut in April.
However if you take him to mean ‘income millionaires’ — the much smaller group who earn more than £1 million every year — rather than millionaires in the normal sense of the word, he does have a point.
Taking income tax in isolation doesn’t necessarily give us the full picture. If we look at wider changes to wealth taxes rather than income tax alone, the evidence suggests that richer individuals will end up paying more money to the Treasury in spite of the reduction to the additional rate.