Testing the limits of the top 1%

Here is a statistic: the top 1% of UK earners paid a third of the total amount collected through income tax and capital gains tax (CGT) last year, according to HMRC.

The figures, obtained through the Freedom of Information Act by Wealth Club and shared with The Times this week, illustrate the balancing act Chancellor Rachel Reeves must pull off ahead of the Budget next month. By all accounts, she's minded to raise taxes on the rich, but very wealthy individuals currently underpin spending on things the government cares about; the top 100,000 earners alone contributed £54.9 billion in income tax and CGT last year – nearly a fifth of total receipts and almost equivalent to the entire Ministry of Defence budget. 

These figures alone aren't an indication that the wealthy pay too much. The rich will inevitably pay a disproportionate amount in countries with progressive taxation – it's even higher in the US, where the top 1% paid 40% of total income taxes in 2022. Plus, ministers are right to point out that people generally don't live in the UK for tax reasons; world class schooling, legal and financial systems shouldn't be ignored. But rebalancing economies to fix wealth inequality is a generational challenge, so in the meantime officials need to find a way to get the balance right; bring in as much as possible from those with income and wealth to tax without losing so many that the tax take falls. 

Whether we've already crossed that threshold is the subject of debate. We've certainly had some high profile departures, but the various data sources suggesting it might be something more sustained are contested. Still, there is plenty of smoke; Ferrari has reduced the number of cars it sells in the UK because "some people are getting out of that country for tax reasons,” chief executive Benedetto Vigna told the FT last week. I think we can reasonably say that the most mobile section of the top 1% are considering their options, at the very least.

Emergency measures

The key question now is whether this government can put ideology aside in favour of a more practical response to mounting evidence. London's housebuilding sector has for months offered a live example – output has collapsed under the weight of higher interest rates, bloated build costs, overburdensome regulation and a slow, unpredictable planning system. A reversal was always going to require some combination of tax cuts for developers, off-plan investors, reductions in red tape or a buyer incentive scheme akin to Help to Buy - many of which appear to run counter to this government's ideology.

Rumours of a package of emergency measures emerged about a month ago and several supposed dates of publication came and went – hinting at fractious debate within government. But they arrived yesterday and credit where credit is due: "what we’ve seen so far suggests officials have listened closely to feedback – and the time-limited nature of the plans should incentivise developers to accelerate progress," writes Knight Frank's Ollie Knight.

Some aspects are merely tweaks to the balance of risks. The Affordable Housing FastTrack threshold will be reduced to 20%, with a 60:40 split between Social Rent and intermediate tenures, for example.

While we’re likely to see more schemes come forward where the economics now make sense, much of the pipeline was headed for viability review anyway, with few projects achieving the 35% threshold. It’s not yet clear what the changes mean for developers with applications already in play – many may need to resubmit for fresh consent. That will be a blow to developers with existing schemes that are stalled for viability reasons. Plus, for housebuilders that do take the 20% route, there’s also a heightened sales risk, with a large share of homes still needing to be sold in what remains a subdued market.

A serious deterrent

More significant, Ollie writes, are the 50% reduction of Community Infrastructure Levy (CIL) for schemes delivering 20% affordable housing, and the removal of late-stage reviews – both time-limited. It's not unusual for schemes of more than 600 homes to have CIL bills in the range of £20 million, and savings of this scale are likely to make a meaningful difference to the viability of moving developments forward.

The removal of late-stage reviews for schemes able to show construction progress by March 2030 could prove pivotal – these reviews assess whether actual sales values and build costs exceed those assumed during the initial viability assessment. If they do, much of the surplus is claimed by the local authority through extra affordable housing or financial contributions. The reviews are widely seen as a serious deterrent to equity investment, often described by developers as overly complex and duplicative.

Developers stand a better chance of raising capital now they have more certainty over profits. They also have a powerful incentive to get building – these measures are time limited, so development will be more profitable now than it will be post-2028, though much depends on how the sales market evolves.

Beasts of burden

The latter point remains the elephant in the room. Returning near-term output to even half the government's target looks unlikely without further stimulus, particularly on the buy-side. The government has shown considerable ambition on its supply-side agenda, but ministers have simultaneously ruled out anything resembling a return of Help to Buy, and new tax incentives to boost the investment market seem off the table given the current fiscal climate. Read Ollie's piece for more.

The issues faced by the housebuilding sector are mirrored to a greater or lesser extent across the British economy. The Economist this week cleverly likened successive governments' approaches regulation to the children's game buckaroo, where players stack cowboy gear onto a mule until it bucks:

"Once politicians find a certain sector to act as a beast of burden—whether housing, energy or pharma—they load it with as much as they can. It works for a while. But eventually the pieces end up scattered."

The piece uses a recent government tender for designing small modular nuclear reactors as an example – the document demanded detailed prescriptions over the type of staff employed. Building is already tricky and expensive. Why make it harder?

The critical lesson the government seems to have learned in the London housing sector is that if you tax and regulate more, you get less output. Guess what — the same lesson plays out across the economy.

Whether the government can stack more spades, lanterns and cowboy hats onto the top 1% of earners is clearly hard to gauge, but there's no doubt that we're at risk of finding out.

In other news..

Oxford rail link to reopen as ‘Europe’s Silicon Valley’ takes shape (Times).