Taxation in an Oligarchy

How the British State Advantages the Rich

Talal Hangari and Tom Zundel

The majority of the British political establishment in both parties is dedicated to serving the interests of elites. While this political aim can be understood through a variety of lenses, taxation offers a useful entry point for building an understanding of Britain’s institutions and their class biases. We argue that the British tax system is fundamentally unjust because it singles out the wealthy for special treatment while shifting a considerable portion of the fiscal burden onto the middle and working classes. This injustice is compounded by the state’s refusal to provide a functional social welfare system to the general public, documented at length by the UN special rapporteur on poverty in a 2018 report on the UK.[1] In sum, Britain’s tax system resembles that of an oligarchy more than that of a democracy. 

Neoliberalism, the economic orthodoxy of the last forty years, has fundamentally regressed the tax code internationally, not least in Britain. The once progressive nature of taxation has reached a crisis point where the ‘have-nots’ pay more in tax to subsidise the ‘haves’. The current system dictates that the poorest 10% should pay almost 47% of their wages in taxation so that the wealthiest 10% can pay just 34.4%.[2] This inequality is substantially worsened by the nature of council tax—even when accounting for rebates and benefits to help afford this, the poorest 10% of households pay almost five times what the richest 10% pay as a share of income.[3] The extent of financial hardship millions face in this country is traceable to this imbalance. Around 40% of problem debt can be attributed to council tax, further exacerbated by the pandemic, leading to a rise of £700 million in council tax debt built up by hundreds of thousands of families that have struggled to make ends meet as a result.[4]

Another striking feature of the UK’s tax system is the greater value placed on wealth over labour. This can be illustrated through capital gains tax, where for 13 years, the lower rate has been 18% rising to 28%, in stark contrast to income tax which is levied at 20%, 40% and 45%.[5] This means that simply investing vast wealth into financial markets is treated more favourably by the government than hard-worked wages. This has led to remarkable situations where some of the very rich have paid just 11% of their gains in tax, lower than those earning £15,000 through labour.[6] Similarly, dividends are also taxed at lower rates than income, with bands of 7.5%, 32.5% and 38.1% all lower than the corresponding income tax bands. In addition, there is a £2,000 allowance on income from dividends before tax.[7] In the first place, wealthier individuals are the most likely to be able to spend their incomes in the stock market. It therefore defies the principle of progressive taxation—that those with a greater ability to contribute should pay more—to tax dividends less than earned income. Furthermore, the nature of Britain’s stock market means that most people do not benefit from these lower rates. The majority of UK-listed stocks (66%) are now owned by foreign investors, with pension funds owning just 2% and UK-resident individuals owning 13.5%.[8] The preferential treatment for dividend income is yet another example of how lower income groups are systematically disadvantaged by the British tax system.

The government’s reliance on a universal regressive indirect tax to raise a substantial proportion of revenues is another indication of the class bias of the tax code. VAT consumes a greater proportion of the incomes of poorer households compared to richer households; furthermore, VAT has steadily increased since it was introduced in the 1970s. Whereas VAT was charged at a rate of 8% in 1974/5, it is now charged at a rate of 20%.[9] Over a similar period, direct taxes on income have been reduced, shifting a greater proportion of the tax burden onto lower income households. Even those who do not earn more than the personal income tax allowance, and are therefore ineligible to pay income tax, must still pay VAT on the goods and services they purchase. This unequal treatment is not difficult to discover. In 2017, ONS figures showed that the poorest quintile of households paid 12.8% of their income in VAT while the richest quintile paid just 7.3%. The ONS stated laconically that ‘indirect taxes increase inequality of income.’[10]

The structure of Britain’s tax system should not come as a surprise. It should be understood as the predictable result of a political establishment that prioritises the interests of the wealthy over the interests of the broader public, a pattern that has been particularly marked since the Thatcher years and the onset of neoliberalism. The Conservative party regularly provides privileged access to senior ministers in exchange for large donations from the rich. The Leader’s Group, a donor club which individuals can join on the condition that they donate at least £50,000 to the party annually, has given the Conservatives £130 million since 2010.[11] The even more exclusive Advisory Board includes several individuals who donate £250,000 to the Tories annually.[12] Predictably, this relationship between wealthy donors and legislators leads to policies that tend to exacerbate inequality rather than diminish it, as has been demonstrated with respect to taxation. Exchanges of money for influence are made at the expense of the majority, and the secrecy that pervades these donor groups is indicative of the political embarrassment they represent in a democratic society. Neither the Leader’s Group nor the Advisory Board is mentioned on the Conservatives’ website. 

The distorting influence of elites on policy is not restricted to the Conservative party however. Labour under Keir Starmer’s leadership has sought to replace the subscriptions of a much-reduced party membership with the money of the super rich.[13] This strategy follows the model employed by New Labour under the leadership of Tony Blair, when the party accepted millions of pounds in donations from wealthy individuals[14] while the proportion of union funding declined significantly. Blair’s business secretary, Lord Mandelson, was clear on party policy: ‘We are intensely relaxed about people getting filthy rich as long as they pay their taxes.’ Clive Lewis MP, Labour’s shadow treasury secretary from 2018-2020, observed that New Labour’s spending projects were ‘funded … by leaning on those further down the income scale’ whereas ‘[t]he huge fortunes of those at the very top … were left almost untouched.’[15] The negative effects of elite power on policy making are therefore not confined to a single political party. Rather, they are a structural feature of the British political system, with only occasional divergences from the norm.

This injustice supplies the moral justification for reform: no society should condone the rampant levels of poverty, excessive inequality and soaring wealth concentration that ours does. The Coronavirus pandemic has not only exacerbated these issues but presents a need for the government to avoid the austere cuts of the last decade and find additional revenue instead. This provides a generational opportunity to rewrite the tax system, making it fairer and creating a more equitable nation. 

After the Global Financial Crisis there was much resentment at a system that benefited the City of London whilst causing devastation to families who lost their homes, jobs, and entire livelihoods. In 2010, Nick Clegg said it was wrong for the “greedy banker” to pay less tax than their cleaner as a direct result of the bias toward capital earnings over wages.[16] Yet since that election, little has been done to rectify this. The fair and progressive action would be to raise capital gains tax rates to those of income tax whilst scrapping the tax reliefs available that only serve to cut that tax bill even further. The IPPR has claimed that this could generate up to £24bn a year,[17] nearly 90% of what the OBR estimates is needed for sustainable public finances.[18] This could be done whilst reimplementing the indexation for inflation, which would mean that the tax avoidance and unequal tax rates of capital gains would be reduced significantly whilst increasing the incentive and ability for people to save and invest,[19] which reduces the effective tax for savings accounts, the main vehicle through which those on lower incomes save money, rather than tax-free ISAs.[20] Dividends should be taxed at least at the same rate as income, if not more, and the personal allowance on dividends should be ended and combined with the existing personal allowance for income. The latter change alone could raise up to £1.3 billion.

Council tax, as established, is deeply regressive and so must be a key pillar for reform. Revaluing council tax bands could help somewhat, however, that is a measure of short-term relief. The only permanent and fair solution is replacing the current system with a proportional property tax. This would mean making council tax proportional to up-to-date values which would give almost a quarter of the poorest 20% of households a yearly tax cut of over £200 with the bottom 50% paying up to 0.9% of income less in council tax under this system.[21] This would shift council tax from the poorest households towards the richest and help make the overall tax system far more progressive and less penalising of the young and poor. This could also bring with it true levelling-up for northern areas of England where council tax is levied at higher rates of regional income than in London, further fuelling the nation’s geographical inequality.[22]

VAT should not be increased further and reductions should be considered where revenue can be generated from other sources.

These changes to the tax code won’t radically alter the UK’s systemic injustices and especially the wealth inequality worsened by the Coronavirus pandemic. However, they do provide the groundwork for a more progressive tax system: one where labour is valued as much as financial speculation and where the poorest are taxed less than the richest.

[1] UN, Report of the Special Rapporteur on extreme poverty and human rights on his visit to the United Kingdom of Great Britain and Northern Ireland, 23 April 2019

[2] ‘UK Taxation – Unfair and Unclear’, Equality Trust, May 2016

[3] Ibid.

[4] ‘Reform ‘unfair’ council tax to help the poor and young, Tory MPs tell Boris Johnson’, The Independent, 11 December 2020

[5]  ‘Overhaul urged for “unfair and outdated” tax system’, Financial Times, 8 September 2019

[6] ‘Reform UK tax to rebuild post-COVID 19 public finances’, London School of Economics and Political Science, 15 June 2020

[7] ‘Tax on dividends’ available at

[8] ‘Foreign investors own 66% of UK-listed shares, analysis shows’, The Guardian, 7 June 2021; ONS, Ownership of UK quoted shares: 2018

[9] IFS, historical VAT data 

[10] ONS, The Effects of Taxes and Benefits on Household Income, Financial Year Ending 2017 

[11] ‘Revealed: The elite dining club behind £130m+ donations to the Tories’, Open Democracy, 22 November 2019

[12] ‘Elite Tory donors club holds secret meetings with Johnson and Sunak’, Financial Times, 30 July 2021 

[13] ‘Keir Starmer seeks billionaire cash as Labour struggles to pay staff’, The Times, 30 July 2021; ‘Big Labour donors returning to party under Keir Starmer’, The Observer, 8 August 2020; ‘Blair-era tycoon backer David Abrahams donates to Labour again’, The Times, 16 November 2020

[14] ‘Multi-millionaires who keep Blair in his office’ The Independent, 23 October 2011; ‘Blair “proud” of Labour donors’, BBC, 7 January 2001; ‘Labour hit by slump in donations from wealthy individuals’, Financial Times, 10 February 2015

[15] ‘A Corbyn government, unlike New Labour, would tax the rich properly’, The Guardian, 12 November 2018

[16] ‘Nick Clegg: ‘I am immensely optimistic. We could do dramatic things’’, The Guardian, 11 April 2010 

[17] ‘Overhaul urged for ‘unfair and outdated’ tax system’, Financial Times, 8 September 2019

[18] ‘UK will need £27bn of spending cuts or tax rises, watchdog warns’, The Guardian, 25 November 2020

[19] ‘We need to reform the tax system as national debt rises—and here’s how’, Institute for Fiscal Studies, 1 February 2021

[20] ‘A manifesto for tax equality’, Tax Justice UK, 5-6, November 2019

[21] ‘Revaluation and reform: bringing council tax in England into the 21st Century’, Institute for Fiscal Studies, 18 March 2020

[22] ‘Calls for reform as report finds council tax and levies on fuel, alcohol and tobacco hit poorer regions harder’, The Independent, 18 January 2021

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