Sunday 11 March 2012

Posted by Jake on Sunday, March 11, 2012 with 8 comments | Labels: , , , , , , , , , , , , ,

There is a predictable perversity in government policy claiming to encourage Britons to work harder. Like so much past policy the government claims that for the good of the nation it must give the rich more and give everyone else less. A carrot and stick policy that hands all the carrots to the wealthy and only swings sticks at the rest. Two current ideas being pursued by the current government's Tory dog, with its Liberal tail noticeably not wagging, are characteristic of this philosophy:

  • Give the rich more money, by cutting the 50% tax rate, in case they become disincentivised slacking tax-dodgers.

  • Give everyone else less money, by cutting tax credits and benefits, freezing wages, and pruning pensions, in case they are incentivised to become slacking scroungers.

The argument that giving the moneyed elite more money will make everyone wealthier manages to ignore the roaring evidence of the past.

Over the last few decades Britain has given the rich a rapidly increasing share of national wealth and national income. In the same period, the lower 90% of the nation has seen no increase in its income at all.  The data from the Paris School of Economics shows how over the 20 years up to 2010 the income of the top 1% has doubled while the income of the bottom 90% stagnated. High rewards for the top brought nothing to the majority.

Since the mid 1980s Britain has doggedly followed the USA with the top 1%’s share of national income racing away from that in other similar nations. In stark contrast to what happened in other industrialised nations the UK and USA allows the wealthiest to swill to their fill. A cash grab led by bankers and eagerly followed by top executives of other industries. A cash grab funded by rip-offs, such as Payment Protection Insurance and many others in many industries, perpetrated on ordinary people.

Even though other nations did not lose their grip on their own wealthiest 1% they were not insulated from irresponsible and rip-off commercial behaviour. The dash for the cash by the bankers of New York and the City of London brought the whole world into economic crisis. Far from ensuring national wealth, giving the rich more brought global ruin.

This grotesque cash-grab can be seen in the change in pay of Britain’s top bosses. The table, from the High Pay Commission, shows that in 1979-80 the directors of top British firms earned around 15 times average pay. By 2009-11 their pay had soared to 75 times average pay. Were the old bosses a bunch of slackers? Do the current bunch deserve a pay multiple five times greater? 

High Pay Commission Report

The focus on the 50% income tax rate as a drag on business is in any case entirely bogus. Most employment in this country is provided by small and medium enterprises (SMEs), in which the average salary of a director is below £100,000 per annum - nowhere near the £150,000 that would incur the 50% rate. The 50% rate doesn’t affect most of those who innovate and build the economy. It mainly affects those who have caused the crash, and those who make their money ripping off Britons: the bosses of FTSE100 companies, the bankers and businessmen prepared to do anything for their next bonus fix, ably supported by their well paid spokesmen in the Confederation of British Industry (CBI).

Thus we see the claim that higher income taxes on the wealthiest are bad for business is bogus.

On the other hand, there are several reasons why higher taxes on the wealthiest would be excellent for business and national prosperity. The excesses of excessively paid bankers have been made painfully evident to the world. The biggest companies have shown they are unwilling to bring the pay of their bosses to sensible levels. And yet less pay would make them better executives. Higher top-rate tax would bring this about:

-         Turn the pursuit of money into the pursuit of excellence. Top executives have long since learned that one of the easiest way to make profit is by scamming their customers. Payment Protection Insurance, in which the banks were forced to return scammed billions to their customers is an example. If you wondered why UK rail fares are so expensive, don’t forget that one person’s grotesque waste is another person’s grotesque profit. And remember that the pitiless profiteering of energy companies causes an additional 2,700 deaths each winter due to people being unable to afford their heating bills. These are the consequences and actions of money-driven executives.

-         We will find more people doing the job for the love of the job, rather than for the love of the money. There are no ‘vocational jobs’, there are only ‘vocational people’. It is an attitude. Thousands of executives in law, banking and other professions curse the work they do but suffer it for the pay. Better we have thousands who practice law to see justice, teach to see their students succeed, and go into banking to see their customers prosper. People will be free to seek their vocation if they are not chained to their pay packet.

-         An excessively paid individual will cling like a limpet to his job. Bosses are much less likely to move on if just one more million pound bonus will buy them just one more super car for the idiot son, or one more apartment in Paris for the supplementary squeeze.

-         If people slack because they aren't paid enough then other people will move up to fill the gap.  Unique individuals, such as Steve Jobs and John Lennon, make up a tiny fraction of the high paid. And even when these unique individuals are gone the world still carries on undiminished, having blinked away a tear or two. Most of the high paid – senior managers, lawyers, doctors, computer programmers, entertainers, et cetera – are easily replaceable and quickly forgotten. If they slack, someone else will take over. And there is no greater incentive to work hard than the opportunity to move to a better role.

The proponents of top-rate tax cuts will claim this is all about envious targeting of the deserving rich. Many of the opponents will claim tax cuts should be aimed at the poor.

They both miss a crucial point. Taxing the excessively paid is also about reducing the rewards for rip-offs. By reducing the rewards we reduce the massive bite they take out of all us Ripped-off Britons.

High Pay Commission Report


  1. The argument that a cut in the top rate of income tax does not increase business activity is never heard on the broacast media and I don't recall reading it in the popular press. Why?

  2. "In a capitalist economy, the true job creators are consumers, the middle class. And taxing the rich to make investments that grow the middle class, is the single smartest thing we can do for the middle class, the poor and the rich."
    Nick Hanauer, venture capitalist, speech to the TED University

  3. See Congressional Research Service report "Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945" at

    Extract from summary which supports this blog:

    "There is not conclusive evidence, however, to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth. Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution"

  4. What is the point of working harder when there is no benefits in doing so? You still can't afford to buy your own home which is the maim reason to work harder, you can't afford to run your car to get to work, you can't afford an holiday to have a rest from your hard working because you have to pay all your taxes, rents, bill, all on top of other daily cost of living on an already low income? average income of the poor worker, £12,000 to £16,500 and £16 being top end. Average pay of a British MP £50,000 plus all fiddle and expenses paid. Everyone would work hard if they only got a quarter of what an MP get for doing nothing?

  5. Capitalist economics is driven by selfinterest and the maximizing of profit as the stated examples bare out. All those in power have a vested interest in maintaining the status quo. Capitalism needs to be controlled, business legal structures must be more akin to Friendly Societies. They are not beholding to shareholders but there members - I.e. their customers. Need a base change both in politics and economics which is based upon equality and a duty of care. Start by pasting this article to my local MP for comment.

    1. Good move. We encourage readers to use our info to write to their MP and any relevant regulators.

  6. You seem to be trying to fix a real problem, the wrong way.

    Yes, there is a breakown of relation between executive pay and performance, and yes, it weakens the economy by rewarding poor executives.

    However, a higher rate of tax just forces highly rewarded PAYE employees to move to another tax regime, lowering UK tax take, and if their company values them enough to pay them £150,000+pa, they will facilitate that. The 50% tax rate proved that, as the amount of tax paid by people earning £150,000+ fell, and the tax burden on evrone else increased as a consequence.

    What needs fixing is the executive pay system. A system where the owners of a company have no say in what their executives are paid. A system where exeutives are not paid based on their performance, or market rate, but instead mutally decide to allocate themselves a bigger share of company revenue each year, even if they do a worse job than their competitors.

    What we need, is for shareholders to be held accountable for poor executive performance. For example, if a pension company owns 20% of shares in a company whose share price sinks by 20%, which represents 20% of his portfolio, the fund manager should face a 1% cut in his pay. If all his investments fall 20% that would equate to a 20% cut in his pay. He would then vote to fire the failed directors, or at least aganst any pay rises. Excutives who do increase the share price would expect appropriate rewards.

    Legislation to outlaw payoffs for bad performance should probably also be considered to lubricate the system.



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