That’s fiscal drag for you

Twenty-five years ago, when the then Tory chancellor Lord Lawson of Blaby introduced the 40 per cent band, it caught only one person in 20. Today, it is just over one in six.

The OBR forecast the number who will pay the higher rates of income tax if the current £41,865 threshold rises in line with inflation. At present, 4.6  million people pay the 40p higher rate and 300,000 pay the 45p additional rate for those earning more than £150,000.

By 2033 the OBR forecasts 9.2 million people will pay the 40p rate and 1.7  million the 45p rate, roughly a third of the workforce.

Wages, over time, rise faster than inflation. Thus tax bands which rise only with inflation will bite harder and harder into wages ever lower down the earnings scale.

That’s how we end up with the completely twattish idea that someone working part time on the minimum wage pays income tax. And Chancellors absolutely love it, of course.

24 comments on “That’s fiscal drag for you

  1. No govt, not even the Blessed Margaret’s, has really managed to shrink the state. Griping about how we pay for it is a second order issue.

  2. Bring back Lawson! Either Nigel or Nigella would do a better job at the Treasury. Osborne had a great chance to discard the volumes of crud that Brown and Darling added to the tax system, but funked it, preferring posturing. Lawson remains the only Chancellor in modern times that really did simplify the tax system he’d inherited. To be fair, Howe at least did away with the exchange controls that had lasted 34 years after the end of the war.

  3. Not to mention that odious withdrawal of the personal allowance over £100,000. Of course, you could argue that you’re lucky if you earn that much which is why no-one has noticed the effect it has.

    As the personal allowance increases, so the band at which the marginal rate becomes an effective 60% increases. When the PA becomes £10,000 you will be paying an effective 60% tax on income between £100,000 and £120,000. The effect is that talk of the top rate of income tax being 45% and kicking in at £150,000 is a myth.

    Above £100,000 you NEVER pay at a marginal rate LESS than 45%.

    For sceptics of that point, if you earn £150,000 then that top £50,000 will be taxed at £20,000 x 60% effective + £30,000 at 40%. Total tax paid = £24,000 = an effective rate of 48% on that top £50,000.

    Add in 2% NI and it’s 50%.

    OK, I won’t get a queue of people joining a bandwagon to demonstrate against it but it’s not much of an incentive for those on their way up and it’s so well hidden that most politicians don’t even know it’s there.

  4. but it’s not much of an incentive for those on their way up

    £41,865 isn’t actually a lot on the way up, from what I know of the NHS it’s midway through Band 8a, which is a senior nurse role where management kicks in.Similarly for Police it’s where Sergeant starts at, and teachers where the “leadership” grades come into effect.

    So, the issue is that anyone who wants to better themselves (and their organisation) by stepping onto the next rung of the career ladder is immediately penalised through tax.

  5. Well, it’s not surprising that people don’t understand fiscal drag or the effect of inflation when The UK’s Leadin Tax Expert ™ can make statements like

    “These are not nominal numbers
    They are cash forecasts”

    What hope is there for the rest of us mere mortals?

  6. Runcie Balspune

    And, from my own field, £41866 is just over the lowest grade point (from 1 August 2014) for a senior system administrator (i.e. generally only technical, rather than personnel management responsibilities) at a university.

    Of course, the employee pension contributions (7.5%) reduce taxable income somewhat, meaning only if you’re on the top of the grade (£45954 gross) will one be responsible for paying at higher rate.

  7. The tax incidence of nearly 13% employee NI + nearly 14% employer NI falls wholly upon the employee.

    The figures presented in the article actually understate the amount the state is confiscating.

    And despite low earners paying combined marginal rates of 20% IT + nearly 25% NI surtax. They are now suffering even more confiscation via the mandatory pension scheme madness.

    Exempting the minimum wage and flat taxing the rest at 33% would leave everyone better off.

  8. “the completely twattish idea that someone working part time on the minimum wage pays income tax”

    I’m still uncertain about this. If you accept the idea of the social contract – that is, a mutual agreement between the individual and the state – then isn’t taxation the visible mechanism of this arrangement, and one which should be all-encompassing for reasons of social cohesion if nothing else?

    Of course I accept that there are many detailed debates to be had about the appropriate levels of taxation and the application of state benefits, but the basic principle remains true, does it not?

  9. @CR

    This is one view of the social contract – that an individual on low income pays part of his small income as a visible sign of his participation in the safety net.

    Another view is that the social contract does not require the very poor to pay since it highly inefficient for the state to take a slice and then give it back to you. In this case the social contract is taken as a given and the poor receive without paying in directly.

    I tend to think that the latter is more sensible especially given the contribution of indirect taxes to the Exchequer.

  10. I’d be happier with the concept of a ‘Social Contract’ if the other side (the state) didn’t keep rewriting the terms whenever it felt like.

  11. @Churm Rincewind

    >the social contract – that is, a mutual agreement between the individual and the state

    I’ve never been entirely sure what people mean by ‘social contract’, but that definition really surprises me. Can there really be a mutual agreement between the individual and the state? Surely the imbalance of power between the parties is just too great for a contract to be anything but a simple statement of coercion.

    Normally, these things are more reminiscent of gangsterism: You pay us this money, we keep all the other gangsters away, and we probably won’t break your knees. OK?

    I’m having a hard time thinking of areas where the state offers any meaningful negotiation on the terms of its interaction with the individual. Even if you have the choice to opt out of some service, you’re often required to pay for the state service regardless (e.g. education, healthcare), and your chosen alternative is forced to observe the same working methods as the state imposes on itself (e.g. waste collection and disposal).

  12. Not taxing the poor makes immediate sense, but then nobody properly values things that are “free”.

    How many people are aware that UK Government spending is well over 10k for every person in the country per year?

    It might be a lot better if all workers were paid the genuine minimum wage (ie enough to fund their share of spending), and then saw the lion’s share of their income being taken in tax.

    We might then take more interest in stupid, wasteful spending.

  13. highly inefficient for the state to take a slice and then give it back to you.

    Yes, the way it is done now is highly inefficient. It doesn’t have to be that way, e.g. a completely flat rate of income tax and a non-means-tested, universal income for all (in lieu of a personal allowance) would be much simpler to implement, as you could tax each income payment correctly without having to have any knowledge of all the other income that person receives in the same tax year.

  14. CR>

    That view is predicated on the idea that tax is the only contribution one can make to society. It’s basically a dismissal of the social value of anyone not a high earner.

    It is, of course, a favourite idea of the pseudo-left.

  15. So there is the concept of social contract that means workers feel part of the state that spends their money? What about non-workers who don’t pay any tax. Should they therefore be denied the vote as they can’t be involved in the social contract.

  16. “What about non-workers who don’t pay any tax. Should they therefore be denied the vote”

    I often tease lefties of my acquaintance with my ‘grand plan’ that everyone automatically gets one vote but then you can earn others by – paying a certain amount of tax, owning property, serving in the armed forces etc- on the basis that those who contribute most and have most at stake should have the greatest influence.

    Sometimes I think “hey, actually, that’s not a bad idea”.

  17. “What about non-workers who don’t pay any tax. Should they therefore be denied the vote”

    I’ll take a punt on this one – “yes”. It might stop all those promises of ‘free milk and honey, if only you vote for us’. It is an inevitability that people who receive handouts are going to vote for more of it.

    It’s probably worth tying it into “contributions” made, such that over a certain amount, that right (to vote) is guaranteed.

  18. My wife hasn’t paid any income tax for the last decade, while she’s been raising our children. Other than the now withdrawn child benefit, she’s not taken a penny from the state. Does she get to vote in the new world ?

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