By JR on Friday, July 15, 2011
The Government needs the rich to take an even bigger slice of the nation's wages if future spending plans are to be met, according to the Office for Budget Responsibility (OBR).
Although growing levels of income inequality have been identified by economists as one of the causes of the recent crisis, analysis by the OBR shows that the Government is more dependant than ever on the rich for tax revenues.
Due to the UK's progressive tax system, the rich pay a far greater share of income tax, which is expected to raise £158bn this year – 27pc of total receipts. As a result, the OBR estimates, for every one percentage point increase in the share of total wages taken by the top 5pc of earners the state receives an extra £2.4bn.
In the eight years between 2000 and 2008, the OBR found, the top 5pc of earners increased their share of the wage pool from 23.3pc to 26.4pc – generating an extra £7.2bn in tax. The top 5pc earn above £60,000, while the bottom 50pc are on less than £18,500.
"If the recent trend of increasing income inequality were to continue it would potentially drive an increase in personal tax receipts," the OBR said in its Fiscal Sustainability Report. "Conversely, a reversal of income inequality would lead to a fall in revenues."
The report demonstrated that the Government cannot afford to let personal tax receipts fall because it is already facing the loss of £29bn of revenues over the next two decades as cars become more fuel-efficient, people smoke less, and North Sea oil and gas reserves are depleted.
"Future governments are likely to need to find replacement revenue streams to keep the tax burden constant, let alone to meet the costs of the ageing population," the OBR said. The report's central finding was that Britain needs an extra £22bn-£58.5bn of tax rises or spending cuts as the costs of the ageing population make the public finances "unsustainable".
Paul Johnson, director of the Institute for Fiscal Studies, said: "It is a little risky for the public finances to be so dependant on such a small chunk of the population." He added that, if the income distribution changes, the Government would "adjust accordingly" by raising rates for those on lower pay.
Earlier this year, Min Zhu, the new deputy managing director of the International Monetary Fund, warned: "The increase in inequality is the most serious challenge for the world."