In many parts of the world, wealth is celebrated and admired. This is especially true in Asia, Africa, and the United States, where the spirit of the “American Dream” fosters the belief that hard work and creativity can lead to wealth.
This ambition led the United States to become the most dynamic economy in the world. However, in the UK and much of Europe, especially in northern countries such as Norway and Sweden, there is growing suspicion and hostility towards the wealthy.
Misconceptions about wealthy people
The wealthy are often portrayed as societal villains responsible for inequality, tax evasion, and even undermining democracy. This portrayal is widespread in the media and movies, where billionaires are often portrayed as greedy, morally questionable figures who exploit legal loopholes to avoid paying taxes. As a tax attorney with over 25 years of experience advising the wealthy, I can offer a different perspective on these common myths.
Myth 1: Rich people pay less in taxes
One common myth is that millionaires pay a lower effective tax rate than cleaners. This misconception stems from a misunderstanding about how the tax system works. In the UK, general income, such as dividends and interest, are taxed at higher rates than dividends. While dividends face a higher rate of 39.35%, they are taxed twice – first at the company level and again when shareholders receive them. This could result in an effective tax rate of up to 54.85%, compared to a 45% rate for general income.
Capital gains, another large portion of wealthy individuals' income, are taxed at rates between 10% and 24% for all taxpayers, with no lower rates especially for the wealthy. For example, a person with income of £1m, divided between profits, dividends and capital gains, would pay an effective tax rate of 38.1%. In contrast, someone with an income of £50,000 would pay an effective rate of 10.3%. The wealthier you are, the more taxes you pay, both in quantity and effective rate, reflecting the progressive nature of our tax system.
Myth 2: Tax evasion is widespread among the rich
Another myth is that paying taxes is voluntary for the rich, thanks to their access to top tax lawyers who exploit loopholes. However, real loopholes are rare, and any existing loopholes are addressed by HMRC's 'General Anti-Abuse Rule'. Aggressive tax evasion schemes are not only unethical, they are also highly ineffective under current regulations.
Myth 3: Non-local companies exploit tax loopholes
The idea that non-resident individuals (non-residents) take advantage of tax loopholes is also misleading. The non-resident regime has been part of the UK tax system since 1799 and does not represent an unintended gap in the legislation. Non-residents contribute significantly to the UK economy, paying an average of £123,000 in tax per year. In total, non-residents contribute around £8.5 billion in UK taxes, not including additional business-related taxes. While the UK is phasing out this regime, countries such as Italy and Greece are introducing their own non-resident regimes to attract wealthy foreigners.
Contributions of wealthy people
Overall, the top 1% of UK taxpayers pay approximately 29% of total income tax, while the top 10% pay 60%. These contributions finance essential public services, including health care. Without these taxpayers, the financial burden on the rest of society would be much higher.
Change the narrative
It is time to change the narrative around wealth. Instead of slandering the wealthy with terms like “filthy rich,” we should celebrate their success and contributions. Recognizing the positive impact wealthy people have on our economy and society can foster a more supportive environment that encourages prosperity and innovation.