Who pays too much/too little tax? ...Inspired (?!) by Jon the Hat

[Alf Bentley]

The "Absolute cvnts" thread recently included a few comments re. who pays too much or too little tax.

Jon the Hat suggested that tax should be paid "proportionately", that the "entire tax credits system should be removed" and that "there is no reason whatsoever why anyone should ever have to pay more than a total of say 40%, including national insurance".

Being a sad git with (currently) time on his hands, I thought that I'd get some approximate figures together to challenge my own strong disagreement with those comments.

Obviously, detailed tax analysis is fiendishly complex and individual/family circumstances vary in a multitude of ways, so I've kept it as simple as possible, just looking at TOTAL income tax & national insurance paid by individual employees on particular income levels.....

Individual on £15k per year: Pays 15.12% of income in income tax/N.I; left with £2,732 DIAB

Individual on £25k per year: Pays 21.87% of income in income tax/N.I; left with £9,532 DIAB

Individual on £35k per year: Pays 25.13% of income in income tax/N.I; left with £16,206 DIAB

Individual on £50k per year: Pays 31.66% of income in income tax/N.I; left with £24,168 DIAB

Individual on £100k per year: Pays 36.84% of income in income tax/N.I; left with £53,158 DIAB

Individual on £200k per year: Pays 41.92% of income in income tax/N.I; left with £106,158 DIAB

"DIAB" stands for "Disposable Income After Basics", my own concept - just deducting an arbitrary figure of £10,000 per year from gross pay. I take the view that it would be hard to live decently on less than this (think food, rent, travel, utility bills, council tax etc.)....though plenty of folk have to. In fairness, I should recognise that some better off people will have higher fixed commitments, but while some of these (e.g. higher council tax) are compulsory and bring no personal benefit, most (e.g. large mortgages, higher VAT on spending) are optional or bring personal benefits.

(If anyone is an even sadder git than me and wants to see how I calculated those figures, just let me know, but I assumed it would be best to avoid further complicating things!)

My conclusions:

- You have to be seriously mega-rich (£150k-plus?) before you pay "a total of 40%" in income tax/N.I. Maybe Jon meant "a total tax rate of 40%", in which case you pay 52% from £34,370 p.a.....but ONLY on income above that level, not on your first £34,370!

- In truth, many individuals on higher incomes pay much lower tax rates than those quoted: white-collar professionals who become companies so as to pay much lower tax; cash-in-hand tradesmen etc.

- Mega-rich major corporations (Starbucks, Amazon, Facebook, banks etc.) often use offshore ruses to pay tiny amounts of UK tax...so Joe Public ends up subsidising their millionaire executives!

- If Jon really believes - like George Osborne - that, in times like these, the priority is to reduce tax on individuals earning £200k, so that they can have a disposable income of £100k+...I disagree!

- Yes, people in the first 2 categories may be entitled to tax credits, but not large amounts, except if they have kids and earn £15-20k (tax credits are minimal above £15k for the childless, and above £25k, for all but massive families)

- I'm not sure why tax credits were set up separately from the tax system, so Jon may have a point there. However, if it was all one system, they'd have to assess 2 spouses/partners separately...and what if the income of one was rising and the other's falling? Of course, you could revert to taxing couples jointly, but that would open a massive can of worms. Something else that I didn't realise was that our tax credit system was started by the Tories (Family Credit in 1996), though it was Labour that mainly expanded it. Also, given falling real pay / rising prices, you'd create terrible poverty if you just "removed the entire tax credit system"....if you cut taxes to compensate, whose would you cut? His or hers (to be briefly heterosexist)?

- N.I. is indeed now "income tax" by another name, as Jon implies. The reason for that is that governments of all persuasions know that "tax rises" cause whinging and lose them votes, whereas "N.I. rises" garner less opposition; I think they should be prepared to argue the case for tax, but I'm probably naive!

- If Jon seriously meant that nobody should pay tax-plus-N.I at a rate of more than 40%, he is suggesting a 12% tax cut for everyone earning more than £35k and a 22% cut for those earning more than £150k....Particularly in times like these, that would create a massive budget deficit. How would that be offset? Unprecedented public spending cuts (Eliminate the benefits system? Make the NHS a user-pays system? Half defence spending? Increase school class sizes to 60 per class?). Alternatively, as well as clamping down on benefit fraud, the government could devote attention to the much bigger - and more fiscally lucrative - priority of stopping tax avoidance by wealthy, self-seeking individuals and corporations!

Tax should NOT be "proportionate", it should be fair but "progressive", so that (within reason) those who earn more pay more - and pay a higher proportion of their income in tax. If you tax someone on the minimum wage at 40%, their life isn't worth living; if you tax Richard Branson at 40%, he might possibly have to do without the gold-plated taps in the 7th bathroom of his villa in the Bahamas!

[Wakeyfox]

ooya bastard, my head hurts!

[Alf Bentley]

ooya bastard, my head hurts!

I know, I should get a life! Work's a bit slow at the moment, so time on my hands (tax bill and income falling as I speak!)

[Jon the Hat]

Actually it was me not Jon the Fox. I will reply after lunch.

[davieG]

I think the one thing that all people should be able to agree on whatever their political persuasion is and that is that it's far too complex.

If tax experts can't understand it, if it needs court cases to interpret the system then there's something fundamentally wrong and at odds with a democratic society.

[Guest]

Tax should NOT be "proportionate", it should be fair but "progressive", so that (within reason) those who earn more pay more - and pay a higher proportion of their income in tax. If you tax someone on the minimum wage at 40%, their life isn't worth living; if you tax Richard Branson at 40%, he might possibly have to do without the gold-plated taps in the 7th bathroom of his villa in the Bahamas!

Nice post and good work Sir Alf.

[Alf Bentley]

Actually it was me not Jon the Fox. I will reply after lunch.

Apologies, Jon. Slip of the typing fingers/brain. I did know that it was you.

I've amended it now.

[MooseBreath]

To be fundamentally fair everyone would pay the same exact share of tax. By making it percentage based you are already taking income into account. By having a progressive system you are then placing the burden even further on higher earners. To go any further than that moves you into the territory where are punishing people for earning a high wage. This is obviously not where we want to go.

[Alf Bentley]

To be fundamentally fair everyone would pay the same exact share of tax. By making it percentage based you are already taking income into account. By having a progressive system you are then placing the burden even further on higher earners. To go any further than that moves you into the territory where are punishing people for earning a high wage. This is obviously not where we want to go.

I completely disagree - and refer you to my last paragraph re. taxing someone on the minimum wage and Richard Branson at the same rate. That would be proportionate, but grossly unfair, because a basic income is needed in order to eat and have shelter, whereas income above that level is "disposable income" that improves the quality of life, but is not essential to life.

Of course, I wouldn't be in favour of tax rates so punitive that they discouraged labour or enterprise, but I certainly don't think we are there now....yet, at a time when the deficit is too high, George Osborne has opted to increase it by cutting tax for those earning more than £150,000 per year.

Currently, using my (approximate) figures, an individual employee on £35k pays 25.13% tax/N.I. and is left with £16,206 p.a. disposable income after basics. Someone on £200k pays 41.92% tax/N.I and is left with £106,158 p.a. disposable income after basics. That seems a more than ample reward for labour or enterprise to me!

We have a progressive tax system - and it should become more progressive, not less so, especially when prices are rising and pay is stagnant. This has a disproportionate effect on those with low incomes, as most of their income goes on essentials.

A progressive system is fair because everyone (in theory) pays the same % on the same slice of income (e.g. 20% tax + 12% N.I. on income between £8k and £35k). It is only fair that people earning more than £35k - and more than £150k - should pay a reasonable but higher proportion on that slice of their income.

[Reynard Bleu]

If only it stopped at direct taxation! You then pay tax of some descripton when you come to spend most of your disposable income VAT, Road tax, fuel duty, customes and excise duty, insurance tax, aiport tax, stamp duty and so on and so on.

[MooseBreath]

Your "basic income" is already taken care of by the tax free allowance, anything after that is your disposable income. I'm not against raising the tax free allowance, but beyond that for it to be 'fair' as opposed to 'optimal' it should be a flat percentage.

[Jon the Hat]

i would love to hear the justification for anyone to pay a higher percentage of their income on income tax. Putting aside for a moment the need for a tax free threshold to ensure the low paid can afford to live, which is just a fact, and the misalignment of the tax thresholds with the NI ones. We bascially have four tax buckets.

1) Not taxed

2) Taxed at 32% (20% + 12% NI)

3) Taxed at 42% (40% + 2% NI)

4) Taxed at 52%/47% (depending on when / if the top rate actually changes)

Now, the only sensible quesion here is why on earth would you have a 32% rate and a 42% rate and a 52% rate? If you need to make people on lower incomes better off, you increase the tax free threshold. This is very fair because if directly favours those on the lowest incomes, incentivises work over benefits, and means you dont have complexity. This should also replace all tax credits, with the exception of a child benefit of an appropriate level.

The only reason then to have a higher percentage, is the idea of a progressive tax rate which increases the tax burden on the higer paid. The common justification for this is the one SAB used above, which is the minimum wage vs Richard Branson approach. We have already solved that problem with the increase in the tax free threshold. Everyone paying tax can afford that tax, which means that any further incremental tax in addition to the flat rate is punative. The result of punative taxes is a further increase in salary levels to properly reward in-demand skills and services, which ultimately falls on the companies which employ higher earners. This is inflationary, and means that the cost of goods and services goes up, and the burden of this inflation falls on the lowest paid who spend a greater proportion of their disposable income on essentials.

The main blocker to any tax reform is exactly the nonsense when is spouted in response to the top rate tax band. There is no justification for this band, Employers have to pay even higher salaries to complensate for it, roles move abroad to avoid it, and the overall tax take is tiny. Yet try to take it away and you are accused of ignoring the poor and favouring the rich. This is a serious problem, becuase it means the sensible discussion is clouded out, and we end up with silly workarounds when what we need is an massive simplication. We need to stop arguing about the people paying tax and start holding the government to account for the fact that it is spending 50% of GDP on public services. No one asked for this, and in the main people cannot even see how much tax they are really paying. Wake up and smell the coffee - government is spending your money on things you don't want and don't need. Wouldn't you rather have that in your pocket to choose how to spend?

[Jon the Hat]

If only it stopped at direct taxation! You then pay tax of some descripton when you come to spend most of your disposable income VAT, Road tax, fuel duty, customes and excise duty, insurance tax, aiport tax, stamp duty and so on and so on.

If we are widening the discussion, this is indeed where those with higher disposable income pay a lot more tax.

[ADK]

Well those who earn more can afford to pay more tax, its that simple really. Your opinion is going to vary depending on whether you want to champion the individual or collective society.

[Jon the Hat]

Well those who earn more can afford to pay more tax, its that simple really. Your opinion is going to vary depending on whether you want to champion the individual or collective society.

It is indeed that simple. And guess what, they do pay more tax, and they would pay more tax with a flat rate! It is called a percentage, and it is very clever like that. Did you know that the top 1% of earners pay 27.7% of total income tax? The next 4% pay 19.3%, and the next 5% pay 10.6%. In Summary that is the top 10% of earners paying 57.6% of all income tax.

[ADK]

It is indeed that simple. And guess what, they do pay more tax, and they would pay more tax with a flat rate! It is called a percentage, and it is very clever like that. Did you know that the top 1% of earners pay 27.7% of total income tax? The next 4% pay 19.3%, and the next 5% pay 10.6%. In Summary that is the top 10% of earners paying 57.6% of all income tax.

Yes i know that. They would still pay less tax than they do now though. All things being equal that would mean the amount of income tax payable by the other 90% would have to increase. Do you think that would be a popular move?

[21st Century Fox]

I assume Jersey and Monaco would implode.

[Jon the Hat]

Yes i know that. They would still pay less tax than they do now though. All things being equal that would mean the amount of income tax payable by the other 90% would have to increase. Do you think that would be a popular move?

Do you think Populist policies are always best for the country? Or should we maybe have a fair tax system instead? We should fund the alignment by cutting Government spending, not by increasing taxes on everyone else.

[ADK]

"Fair" is subjective.

Whether you cut government spending or not, you would still be increasing the proportion of tax revenues paid by the majority.

[Guest MattP]

It is indeed that simple. And guess what, they do pay more tax, and they would pay more tax with a flat rate! It is called a percentage, and it is very clever like that. Did you know that the top 1% of earners pay 27.7% of total income tax? The next 4% pay 19.3%, and the next 5% pay 10.6%. In Summary that is the top 10% of earners paying 57.6% of all income tax.

Quite staggering statistics to be honest.

Incredible some people actually want to pursue policies that would force a lot of these people out of the country.

[Jon the Hat]

"Fair" is subjective.

Whether you cut government spending or not, you would still be increasing the proportion of tax revenues paid by the majority.

Yes - the majority are the ones using the majority of the services, and that is fair.

[Captain...]

It does need to be simpler and be an incentive to work, so I would make tax free earnings 20,000 and then anything earnt over that is taxed and NI at 50%.

That is simple fair and effective will do away with a lot of tax credits. If you fall below that mark you are able to claim benefits, if deserving, to get you up to that mark, but on higher.

Those that earn 30k pay 5k in tax, those that earn 40 pay 10, those that earn 100 pay 40k.

But this is not the problem, the problem is people setting themselves up as companies paying business tax and taking a salary of 15k and paying little income tax, then getting a tax free dividend at the end of the year. Using off shore bank accounts to avoid paying tax, if everyone played fair it would lower the tax amount for all, or, first of all, help drag this country out of a crippling spiral of debt and deficit.

[Captain...]

Quite staggering statistics to be honest.

Incredible some people actually want to pursue policies that would force a lot of these people out of the country.

It's not that surprising when 10% of the country own/control over 50% of its wealth.

[ADK]

50% tax on earnings over 20K would lead to the rich paying more tax than they do now wouldn't it?

[purpleronnie]

50% tax on earnings over 20K would lead to the rich paying more tax than they do now wouldn't it?