Something of an indictment of our taxation system

“ … a considerable number of single-earner households where the earner is a higher-rate taxpayer, are in the fourth income decile i.e. in the lower half of the income distribution.

Higher rate tax reaches down into the bottom half of the income distribution.

Even if you are in favour of properly progessive, possibly even high, taxation, that should make you stop and think.

Two grandfather\’s ago those in the bottom half of the income distribution were barely paying income tax at all, let alone higher rate such.

Agreed, the fact that the sun rises each morning also confirms to me this point, but this does confirm to me the point that the real problem with the UK income tax system is that it starts at too low an income and rises too quickly: the higher rate kicks in at too low an income.

It\’s probably time to try and think again of the actual moral issues of taxation rather than carrying on tinkering with the accretions and barnacles that have glued themselves to the system over the past century or so.

Along the lines of, say, that absolutely no one on minimum wage should be paying income tax or NI (which, with the pensions reforms coming, is now just another name for income tax. That\’s the last real link between contributions and benefits gone). And that higher rate tax, if we\’re to have such, should really only kick in for the top 10% of earners: you know, those we might describe as rich? Or at least, \”high income\”?

We\’re limited in what we can tax at the top as well, that Laffer Curve thing. We can\’t go around having 70/80/90% tax rates at the top because such rates simply don\’t raise revenue.

Yes, this does rather box in revenue raising: the Treasury would lose some £30 billion by taking all those minimum wage people out of tax and NI (rough guess). We\’re not far off the upper band limit I\’ve suggested. It\’s roughly the top 10% of individual earners that pay higher rate: those figures quoted are pointing out that household income is really rather different from individual, that\’s all.

Whether or not the 50% rate is actually revenue raising is arguable (and people do argue about it). So that would mean no more rises at the top end.

Which leads us to, well, if we\’re to apply this simple morality tale to the tax system, that government needs to be taking in and thus spending £30 billion a year less.

For what is the moral justification of stating that you may not sell your labour for less than £6 an hour but, by the way, we\’d like 45%* of that when you do?

* Yes, 45%, two NIs and income tax.

19 comments on “Something of an indictment of our taxation system

  1. Actually 40%, because employer’s NI changes the denominator, so it’s 45.8/113.8.

    Which is what people think the higher rate tax is.

    But that’s pedantry – your basic point is perfectly true.

  2. “with the pensions reforms coming, is now just another name for income tax. That’s the last real link between contributions and benefits gone”: you’re bein’ a bit previous there, guv. Wait an’ see.

  3. This should be the current governments UXB for future tax’n’spend ones. Pass a law stating the principles you mention, plus perhaps my favourite one – that no individual can be taxed at more than X% of his or her annual income, by whatever means. IE if you keep records of everything you spend in one year and all the income tax, NI, VAT, excise duty, IPT, fuel duty, road tax etc etc comes to more than a certain % of your income for that year you get a refund.

    It would be VERY unpopular for such a rule to be abolished, especially if the % were set low enough that plenty of people could expect a refund.

  4. I have never understood why tax allowances are not transferable.

    In a house where one person is working and someone else of working age is not claiming benefit, ie is supported by the worker, why shouldn’t the allowance be transfered? I don’t care whether its a married couple, a civil partnership or a couple of siblings, it seems the right thing to do.

    Tim adds: Because this would be taxation at the household level. We’ve moved, quite clearly, to taxation as an individual. I think this is correct, it’s part of the great economic emancipation of women. Ritchie wants us to go back to taxation as a household: is that enough for you to see that it’s a bad idea?

  5. @Serf,

    Good point, especially as we have got in to the habit of using household income when measuring poverty rates.

  6. “Along the lines of, say, that absolutely no one on minimum wage should be paying income tax or NI” .. how many times do I have to point out that this is wrong – all citizens should pay tax, the only question is how much.

  7. Tim: don’t make an ad hominem, even though Ritchie is wrong about almost everything. How does emancipation of women have anything to do with household tax?

    A woman can earn more than her husband, a lesbian couple or two sisters is a household of women only, a single mum and her kids aged 22 and 20 who go to uni and earn a bit in the summer..

    johnny bonk:
    citizens or residents? what if you rephrase tim’s words as “everyone on min wage should pay tax, but at the rate of 0%”? isn’t the idea that there is no point in the state collecting £100 from someone’s income if it would cost nearly that much to admin / process it anyway?

    Tim adds: “How does emancipation of women have anything to do with household tax?”

    Because the individual taxation of women is economic emancipation. They are no longer taxed as appendages of the household.

  8. Chris, with a transferrable allowance, assuming the man is working, then if the wife goes out to work her income will be taxed in full, with no allowance.

    With household taxation it’s even worse, because her income will be taxed at husband’s highest tax rate.

    With independent taxation, and non-transferrable allowances, if wifey goes out to work then her first few thousand of income is tax-free, because she’s using an allowance that would otherwise not be used (potentially all of her income is tax-free, if she only works part-time).

    Whether we like this is another matter – one could argue that wifey should be looking after the home and hubby should get double allowances because he’s providing for two.

    But Tim’s right; by making it more beneficial for wifey to go out to work, independent taxation has encouraged the economic emancipation of women.

  9. Note that this mainly works for middle-income wage-slaves.

    If you’ve got lots of investments, or your own business, it’s much easier to shift some income to wifey so that her allowance is used up without her having to go out to work.

    Or if your income is low, then benefits (inc. tax credits) are more important, and they’re calculated on a household basis.

    So actually independent taxation encouraged economic emancipation for middle-class women.

  10. Is it a good thing if significant numbers of voters dont pay tax? Is there not then an incentive for them to vote for higher taxes on those that do pay?

  11. dearime, even without the proposed pensions reform, the Pension Credit (or whatever it’s called) has already made NI contributions pretty much irrelevant.

    If you worked & paid NI, you get a pension. If you didn’t, you claim Pension Credit.

    Indeed the minimum under the Pension Credit is higher than the basic State pension, so if your NI contributions only qualify for the basic state pension, you’ll be claiming Pension Credit anyway to top it up.

    So most people get the same whether or not they contributed, and most have to claim a means-tested benefit to get even that.

    The only way contributions would be relevant would be if you qualified for quite a lot of higher state pension (you’d need 150% of basic to get you much above the Pension Credit level), and hadn’t opted out.

    So the ‘contribution principle’ is pretty much dead already, even without the IDS reforms.

  12. Eddy (#10) – in theory, yes.

    But since we’ve got different tax rates at different income levels, low earners can vote for higher taxes for ‘the rich’ without it affecting their own tax bills.

  13. While there is much government spending that I find quite superfluous (foreign wars, membership of the EU, nannying adverts to name three), in essence, taxes go towards services that governments provide by taking money off taxpayers. I cannot understand why people who benefit from said services should not pay for them, if private companies provided them they would have to. You might just as well argue that those on the minimum wage should not pay for bread and milk.

    Correct me if I’m wrong, but in the UK, to be in the top 10% one only needs to be earning around 50k. There is certainly no way that such a person is rich and even “high earner” is stretching it. Such a person may have a nice lifestyle but it is highly likely that they are working hard for it so why should the state take a large wedge of their hard earned income to subsidise services for those on minimum wage?

  14. It seems perverse to me that we should tax people and then hand it straight back in benefits (eg child benefit). This is a disincentive to work twice over.

    I would like to see the option to waive child benefit in return for a higher tax-free earnings threshold. I like to think this would raise the amount of income generated, with all its accompanying benefits.

    I’d be interested to know what others think, or any research that may have been done.

    Tax research in the UK…. There ought to be someone doing that….!!!! 😉

  15. @JohnnyBonk: Just because someone doesn’t pay income tax/NI, it doesn’t mean they pay no tax at all. Council tax, VAT, excise duties, fuel duties, road tax, IPT, even the idiot tax (lottery) all take their bite out of your income too.

    I think linking the tax free allowance to the minimum wage level is political gold for those who espouse lower taxes. What party is going to put in its manifesto that it wants to increase taxes on the lowest paid in society?

  16. Such a person may have a nice lifestyle but it is highly likely that they are working hard for it

    Hmm. I’m entirely certain that the average person who works a full-time job for gbp50k per year has a much more pleasant time of it at work than the average person who works a full-time job for gbp15k a year.

    gbp15k jobs approximate to “shovelling shit and being told to like it”; gbp50k jobs approximate to “being a skilled professional, in a career you’re somewhat interested in, with a fair degree of autonomy”.

  17. “shovelling shit and being told to like it”

    At least they don’t take their work home with them.

  18. The US tax system allows you to choose whether you want to be taxed individually or as a household.

    What’s not to like?

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