The rich in Britain: Always with us? | Business| Economy and finance news from a German perspective | DW | 11.11.2019
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The rich in Britain: Always with us?

Asked if the poor will always be with us, a recent Nobel Prize winner told DW he certainly hoped not. But perhaps the rich will, if recent findings by the UK's Institute for Fiscal Studies (IFS) are anything to go by.

Brexit Debatte im britischen Unterhaus (picture-alliance/AP Photo/Parliament TV)

Jacob Rees-Mogg

"From the ultrahigh net worth perspective, a Labour government under [Jeremy] Corbyn is a much greater threat to them and their businesses and their wealth than Brexit," Dominic Samuelson, chief executive of advisory agency Campden Wealth, told The Guardian newspaper recently.

The battle lines are being drawn in the runup to the December 12 election and the debate on poverty and wealth is part of the discussion. 

the winners

The three joint winners of the 2019 Nobel Prize for Economics — Abhijit Banerjee, Esther Duflo and Michael Kremer

Poverty, but not of thought

Three US economists, Abhijit Banerjee, Esther Duflo and Michael Kremer, recently won the 2019 Nobel Prize for Economics for their work on alleviating poverty around the world. Banerjee, told DW recently that "there are many poverties; some people just lack resources, but others lack education or confidence or freedom to act [especially women]."

"Poverty is not inevitable," he went on. "The world is rich enough that the kind of desperate poverty we still see in many places has no reason to exist. We must solve the many problems that cause poverty carefully, one by one."

Asked if the political will existed, he added: "I think so. At least I hope so, since there is no possible justification for not doing something. We should talk about the many successes in fighting poverty not just wring our hands about it."

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The rich: Another story

The UK's Institute for Fiscal Studies (IFS) recently reported that wealthy professionals often choose to form companies and partnerships that make them eligible for capital gains tax (CGT) rates rather than collect salaries that would be subject to the top rate of income tax.

Over 9,000 of the richest people in the UK collected about 1 million pounds each in capital gains in 2018 in this way, the IFS said. 

UK tax office (HMRC) data show 9,000 people paid just 5.1 billion pounds (€5.6 billion, $5.9 billion) in tax on 33.7 billion pounds of capital gains income in the latest financial year, which means an average tax rate of 14.8%, lower than the basic rate income tax of 20% that people pay on salaries of between 12,501 pounds and 50,000 pounds.

People recording gains of more than 1 million pounds each accounted for 62% of all capital gains receipts in the 2017-18 financial year, according to the latest available data.

"If one uses the top income tax rate as the baseline, then a static estimate of the tax revenue currently forgone on taxable capital gains above 1 million pounds would be 33.7 billion pounds oil lost revenues," Andy Summers, a tax expert and assistant professor at the London School of Economics, told DW.

From 1988-1998, capital gains were taxed at an individual's marginal income tax rate, subject to an indexation allowance for inflation. In 1998, the Labour government replaced this indexation allowance with taper relief, which reduced the tax payable the longer an asset had been held.

Shortly before the 2008 financial crisis, there was a growing concern that some industries, in particular private equity, were using taper relief to achieve very low effective rates of CGT.

Consequently in 2008, the Labour government replaced this system with a flat rate of CGT of 18%. However, to avoid increasing the rate (compared with taper relief) for private business owners, at the same time they introduced "Entrepreneurs' Relief," which provided a rate of 10% for gains on shares in private businesses where the shareholder was also an employee.

British coins

Over 2 million British families will be 1.50 pounds a week worse off by the end of the decade due to welfare reforms, inflation and rising rents

What can be done to rectify it?

Many UK think tanks and policymakers are now opposed to Entrepreneurs' Relief. For example, the IFS, the Resolution Foundation and the Institute for Public Policy Research (IPPR) favor scrapping it and replacing it with more targeted policies to encourage entrepreneurship and startup businesses.

The two main parties in the current general election have not yet confirmed their position on CGT, or Entrepreneurs' Relief specifically. Summers believes it is likely the Labour Party may adopt the IPPR's proposed reforms. "It currently seems unlikely that the Conservative Party would abolish Entrepreneurs' Relief," Summers concluded.

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