Welcome back to Gary's Economics today we're gonna explain "who pays tax?"

so I want to do a quick explanation basically of  exactly how the tax system works and who pays tax  

um largely because there are a lot of sound bites  bouncing around that are intentionally misleading  

which are designed to make people think that the tax system is already unfair to the rich 

so the big one which you hear, which I get thrown at me sometimes when I do interviews  

is that the richest 1% already pay 28% of tax  now this is very misleading so the first thing

is that is actually not the 'Richest' 1% of people it is the top 1% of 'Taxpayers'

now every year we get The Times Rich List  the rich people in the country and we  

also get another list of the top taxpayers in the  country and I think it's really interesting to go  

and compare these 2 lists, often what you'll find is there's almost nobody who is on both of the lists

which I think is quite interesting and that is because the people who pay the most tax  

uh whilst they are generally rich people they are  NOT the richest people in the country and we're  

going to explain in this video why 'people pay the  most tax are not the richest people in the country'  

the second reason that statistic is misleading  is because that is talking about only income tax  

so it's saying the people who pay the top one the  top 1% income taxpayers are paying 28% of  

income tax um but actually income tax is only  one form of tax there are other forms of tax  

which are tilted much more towards ordinary  people so for example the government raises  

more from VAT and from National Insurance than  it raised on Income Tax. VAT (Value-Added Tax) is

a tax which is on consumption; ordinary and poorer people pay a much higher rate of VAT as a % of  

their incomes and that is because ordinary people  spend a much higher percentage of their income

and National Insurance is a tax which specifically excludes income from wealth 

which is the vast majority of the income that richer people make um so

basically these statistics are misleading  and the best way for you to understand it is for  

me to explain exactly what is really happening  which is we have a tax system which is  

'broadly progressive' meaning people who have higher  incomes pay higher tax at sort of ordinary income level  

so if you are earning £100,000 a year from your work you'll pay a higher rate of income tax and

tax overall than somebody earning £15,000 or £20,000 a year that stays true up until about  

£150,000-£200,000, then once you start seeing people who are earning above

£200,000 what we actually see is that the  rates of tax paid start to fall significantly  

and the reason for this is that our current  tax system is very well designed for taxing  

working people so if you work for your money  which most people do or I work for the money  

that I made especially if you're earning a high income you will pay relatively high levels of tax  

you know into the sort of 60%'s once we include  National Insurance and Income Tax and VAT  

but the tax system as it is is not really designed to tax people whose wealth comes from... 

whose income comes from wealth um if  you don't understand the concept of income  

from wealth I would recommend you watch  the video on the channel what as well  

um that basically explains that there's a huge  amount of wealth in this country not just housing  

but also a lot of commercial wealth: land, shopping  centres, office buildings, factories, wind farms  

industrial wealth and these are owned by richer  people and they generate enormous amounts of  

income from this world so if we consider someone  like Rishi Sunak who is worth about according to  

The Times Rich List £700 million, he will make  every year from his wealth probably something like  

£30 million, remember that's not from his  work right that is the money that he just gets  

for owning lots of stuff like your mortgage or  your house um the way the tax system is designed  

it is very possible for people such as Rishi Sunak who generate huge amounts of income from wealth  

to legally avoid... well first of all they don't have to pay income tax on a lot of that and they can legally avoid

many forms of taxes, so the end result is in many cases these people pay rates as low

as 10% or sometimes even lower on the income from their wealth  

so what we actually have is a tax system which is  progressive for ordinary people so the rate you pay  

is higher the more you earn and then once you  get into this realm of very very wealthy people  

the rate starts to collapse and in particular  the rate on inherited wealth especially for  

phenomenally wealthy people falls to zero  so you end up in a situation where the tax  

system is not really progressive it's basically  progressive for ordinary people and essentially  

optional for wealthy families um I think that's  probably the fairest way to describe the tax  

system that we have which is essentially it's  a class-based tax system so I'm a relatively  

wealthy person I'm worth you know more than a  couple of million pounds and I earnt that through  

working so when I worked I had to pay it was  actually a 50% top rate of income tax at the time  

at the same time as I earned a few million pounds  from working the Duke of Westminster inherited  

£9,000,000,000 which is you know maybe three  thousand times what I earned and he paid nothing  

so I think that really highlights essentially  what we have is a class-based tax system I  

earned many many thousands of times  less than the Duke of Westminster  

but I come from a poor family so I have to  pay 50% tax the Duke of estimates that earn  

a thousand times more than me but he is the  Duke of Westminster so he pays 0% tax  

and I think it's it's quite interesting that in a way the tax system is kind of moving  

back towards what it was like in medieval  times where essentially working people pay tax  

to the aristocracy um because if you look  at for example someone like Rishi sunak  

the amount of tax that he pays is enormously  less than the amount of cash flows he receives  

from working people and increasingly a big chunk  of the tax that you pay literally goes towards  

paying government debt interest to the Rich, um so you pay your tax - a lot of that goes to the Rich  

then you pay your rent - that goes to the Rich  you pay your mortgage - that goes to Rich 

you go to buy food and that goes to the landowners you buy energy and that goes to the energy owners  

um so essentially what you have essentially looks  increasing like a very very extractive system  

and the lack of taxation of the rich creates  a big problem with flows of wealth so recently  

I've been really trying to lobby politicians, very  unsuccessfully, to start taxing wealth, tax working  

people less on their income and tax wealth more  and you know I've been trying to push them to tax  

people who have a wealth of over £10 million; 1% of their wealth um and they don't want to do that 

but wealthy people will make three, four, five percent income on their wealth anyway so  

what that means is even if you were to tax  them one percent they would still generate an  

enormous excess income that they could then use to  compete with your kids to buy property and I think  

when you think about the tax system I think  another story that illustrates it quite well  

is you know I've got friends um you know  I think of one friend who's you know very  

well educated and he earns probably about three  times average income now and he lives with his  

mum to try and save up money to buy a house and  because he's earning higher than average income  

he probably pays you know above 50% if you include National Insurance on his on his income  

um and when he goes to buy properties those  properties end up getting bought by people who  

got given half a million pound tax-free from  their mum, um I think this kind of highlights  

what's happening you know my friend is paying  50% because he's from a poor family and that  

person who buys that house is paying 0% on their income because they're from a better off family  

and The Duke of Westminster inherits £9 billion  and pays nothing because he's from a very very  

rich family um so yeah the tax system as it is, I should probably just talk briefly about VAT & N.I. 

National Insurance is a form of income tax that only applies to working people

only applies to work, so you know my income, I pay income tax on some of my income  

but I don't have to pay any National Insurance because I don't work (well I do work but I don't make any money) 

from this work um so we have a form of tax National Insurance specifically targeted at

working people then you have VAT which is on  consumption now very rich people consume very 

very small percentage of their income so they pay very little VAT, so VAT targeted at ordinary people  

National Insurance targeted at working people  Income Tax avoidable for the rich, Inheritance Tax   

avoidable for the rich, the end result is you have  a tax system which looks progressive for ordinary  

people because you're only comparing yourself to  people around you who are ordinary people at the  

same time you have this small group of people  who are phenomenally Rich who are increasingly  

buying everything you don't often get to see  in day-to-day life that they are paying nothing  

generating huge amounts of income and using  that income to buy the rest of the assets so um 

who pays tax uh if you're a working person in  an ordinary financial situation uh, YOU!   

who doesn't pay tax? very wealthy families, the people who receive your mortgage payments

your rent payments, um the money you spend on food and bills, they don't pay any tax on that  

and they are then using that money to buy the  rest of the wealth so it creates this really bad  

structural problem where because we're not taxing  the rich, because they have these huge incomes  

they are then buying all of the rest of the  assets so they kind of end up being like a

black hole for assets sucking all of the assets out of society and if we don't take any action

against that it is inevitable that in you know 20 years, 30 years, ordinary families will  

not have any assets left basically. it will be very difficult to own property and if you do own property 

you'll be forced to have an enormous mortgage um so yeah tax is paid by working people  

it's not paid by the rich, if we don't do something  about that inequality will grow massively we will  

lose our middle class who will lose their assets  um I'd really encourage you you know if you're  

an older person who owns property to think about  what that means to your kids and your grandkids  

um if you're a younger person this is probably  no news to you but um try and think about ways  

to communicate clearly to older generations you  know what this means for the future of the country  

if we don't fix the tax system then the  majority of the people in this country  

would end up being very poor but if we do  fix the tax system we can change it so um  

yeah understand what's happening share this video  and um yeah help us to change it thank you! happy?